"What’s Your Fraud IQ? Think you
know enough about corruption to spot it in any of its myriad forms? Then rev up
your fraud detection radar and take this (deceptively) simple test." by Joseph
T. Wells, Journal of Accountancy, July 2006 ---
http://www.aicpa.org/pubs/jofa/jul2006/wells.htm

The Investor Protection Trust provides independent,
objective information to help consumers make informed investment decisions.
Founded in 1993 as part of a multi-state settlement to resolve charges of
misconduct, IPT serves as an independent source of non-commercial investor
education materials. IPT operates programs under its own auspices and uses
grants to underwrite important initiatives carried out by other
organizations.

Being Honest About Being Dishonest
Democrats openly admit that most of the stimulus money is going to counties that
voted for ObamaA new study released by USA Today also finds that
counties that voted for Obama received about twice as much stimulus money per
capita as those that voted for McCain. "The stimulus bill is designed to help
those who have been hurt by the economic downturn.... Do you see disparity out
there in where the money is going? Certainly," a Democratic congressional
staffer knowledgeable about the process told FOXNews.com. John Lott, "ANALYSIS: States Hit
Hardest by Recession Get Least Stimulus Money," Fox News, July 19,
2009---
http://www.foxnews.com/story/0,2933,533841,00.html

Question
Why doesn't some of the information below appear prominently on Hannaford's
Website?Fortunately, there are no Hannaford stores close to where I live.
Hannaford cut corners when protecting customer privacy information.

Hannaford is a large New England-based supermarket chain with a good
reputation until now.
Recently, Hannaford compromised credit card information on 4.2 million customers
at all 165 stores in the eastern United States.
When over 1,800 of customers started having fraudulent charges appearing on
credit card statements, the security breach at Hannaford was discovered.
Hannaford made a press announcement, although the Hannaford Website is seems to
overlook this breach entirely ---
http://www.hanaford.com/
My opinion of Hannaford dropped to zero because there is no help on the
company's Website for customers having ID thefts from Hannaford.
I can't find any 800 number to call for customer help directly from Hannaford
(even recorded messages might help)

And when the
Vice President of Marketing gets quoted in
the press talking about the security breach, it means that
there is no CIO (Chief Information Officer) at the company.
It means their network was designed haphazardly with only a
minimal thought to security. What, they couldn’t get a
quote from the President of Marketing? How
does the dairy stocker in store 413 feel about the breach?
He probably knows as much about network security as the
Marketing VP.

All of this
means that as the days go on, you will see more and more
headlines talking about this breach being much worse than
originally thought. The number of fraud cases will climb
precipitously… and no one will be fired from Hannaford.

If you shop
there and have used a credit card, get a copy of your credit
report ASAP.

By law, you
get one free credit report per year. You can contact them
below.

Nelnet will pay $55-million to settle its share of
a whistle-blower lawsuit that accuses it and several other lenders of
defrauding taxpayers of more than a billion dollars in student-loan
subsidies.

The settlement, which
Nelnet announced late Friday, is the latest to result from a lawsuit brought
by Jon H. Oberg, a former Education Department researcher, on behalf of the
federal government. A federal judge ordered Nelnet and seven other
student-loan companies to participate in a settlement conference last week
after two of the other defendants in the case, Brazos Higher Education
Service Corporation and Brazos Higher Education Authority, reached a
tentative settlement agreement with Mr. Oberg.

Among the other defendants in the case is
Sallie Mae, the nation's largest student-loan
company. A year ago, the Education Department's inspector general
issued an auditconcluding that Sallie Mae
overbilled the Education Department for $22.3-million in student-loan
subsidies and should be required to return the money to the department.

The House of Representatives has banned earmarks of
funds directly to companies, but many corporations that have received
earmarks in the past and that want to keep them coming are working through
nonprofit groups -- including colleges and universities -- to do so, The New York Timesreported. The earmarks
technically go to the nonprofit group, which then subcontracts much of the
work to a corporate entity. Among the universities cited in the article are
Eastern Kentucky University, Pennsylvania State University and the
University of Toledo.

HAVE FRAUD FEARS?
http://fvs.aicpa.org/Resources/Antifraud+Forensic+AccountingSearch no further than the AICPA’s offering of
antifraud and forensic accounting resources. Click “Tools and Aids”
to download Managing the Business Risk of Fraud: A Practical
Guide, which outlines principles for establishing effective
fraud risk management. The paper was released jointly by the AICPA,
the Association of Certified Fraud Examiners and The Institute of
Internal Auditors (see “Highlights,”
page 16). The site also offers fraud detection and prevention tips,
including an “Indicia of Fraud” checklist and case studies. There’s
also information on the newly created Certified in Financial
Forensics (CFF) credential (see “News
Digest,” Aug. 08, page 30) and upcoming Web seminars.

BE CRIME SMARTwww.fbi.gov/whitecollarcrime.htmThink of the most outrageous business fraud
scheme you’ve ever heard of— you’re likely to find it, plus hundreds
of other white-collar crime cases—at this site from the FBI. Look
under “Don’t Be Cheated” for a fraud awareness test or click on
“Know Your Frauds” for access to the FBI’s analysis of common fraud
schemes, including the prime bank note scheme, telemarketing fraud
and up-and-coming Internet scams. CPAs and financial professionals
can access details on options backdating, securities scams and
investment fraud under “Interesting Cases” or learn about the FBI’s
major programs involving corporate, hedge fund and bankruptcy fraud.

SURF THE FRAUD NET
www.auditnet.org/fraudnet.htmJim Kaplan, a government auditor and author of
The Auditor’s Guide to Internet Resources, 2nd Edition,
hosts this Internet portal for auditors, which provides fraud
policies, procedures, codes of ethics and articles on a range of
topics, including internal auditing, fraud risk mitigation and
preventing embezzlement. The site also features a newsfeed, piping
in daily fraud news from around the world..

I saw one of these clips on ABC News last night. It showed a University of
Phoenix recruiter assuring a long-time, street sleeping homeless man that he was
certain to get a job teaching in NY or Arizona if he took out government loans
to attend the University of Phoenix.

More Hidden Camera Findings on U. of Phoenix The latest entity to send undercover investigators to
the University of Phoenix is ABC News, which on Thursday reported the results.
They include a recording of a recruiter giving incorrect information about
whether a program would enable a graduate to become a teacher, and encouragement
to take out as large a student loan as possible -- even more than the fake
student needed. William Pepicello, president of the University of Phoenix,
appeared on camera to say that "absolutely" the university could do better in
terms of the way it recruits but that the answer to whether Phoenix encourages
recruiting like that shown in the segment is "absolutely not." Inside Higher Ed, August 20, 2010

Why should
members of Congress be allowed to profit from insider trading?
Amid broad congressional concern about ethics scandals, some lawmakers are
poised to expand the battle for reform: They want to enact legislation that
would prohibit members of Congress and their aides from trading stocks based on
nonpublic information gathered on Capitol Hill. Two Democrat lawmakers plan to
introduce today a bill that would block trading on such inside information.
Current securities law and congressional ethics rules don't prohibit lawmakers
or their staff members from buying and selling securities based on information
learned in the halls of Congress.
Brody Mullins, "Bill Seeks to Ban Insider Trading By Lawmakers and Their Aides,"
The Wall Street Journal, March 28, 2006; Page A1 ---
http://online.wsj.com/article/SB114351554851509761.html?mod=todays_us_page_one

The
Culture of Corruption Runs Deep and Wide in Both U.S. Political Parties: Few if
any are uncorruptedCommittee members have shown no appetite for
taking up all those cases and are considering an amnesty for reporting
violations, although not for serious matters such as accepting a trip from a
lobbyist, which House rules forbid. The data firm PoliticalMoneyLine calculates
that members of Congress have received more than $18 million in travel from
private organizations in the past five years, with Democrats taking 3,458 trips
and Republicans taking 2,666. . . But of course, there are those who deem the
American People dumb as stones and will approach this bi-partisan scandal
accordingly. Enter Democrat Leader Nancy Pelosi, complete with talking points
for her minion, that are sure to come back and bite her .... “House Minority
Leader Nancy Pelosi (D-Calif.) filed delinquent reports Friday for three trips
she accepted from outside sponsors that were worth $8,580 and occurred as long
as seven years ago, according to copies of the documents.
Bob Parks, "Will Nancy Pelosi's Words Come Back to Bite Her?" The National
Ledger, January 6, 2006 ---
http://www.nationalledger.com/artman/publish/article_27262498.shtml

And when
they aren't stealing directly, lawmakers are caving in to lobbying crooksDrivers can send their thank-you notes to Capitol
Hill, which created the conditions for this mess last summer with its latest
energy bill. That legislation contained a sop to Midwest corn farmers in the
form of a huge new ethanol mandate that began this year and requires drivers to
consume 7.5 billion gallons a year by 2012. At the same time, Congress refused
to include liability protection for producers of MTBE, a rival oxygen
fuel-additive that has become a tort lawyer target. So MTBE makers are pulling
out, ethanol makers can't make up the difference quickly enough, and gas
supplies are getting squeezed.
"The Gasoline Follies," The Wall Street Journal, March 28, 2006; Page
A20 ---
Click Here

Once again, the power of pork to sustain incumbents gets its best demonstration
in the person of John Murtha (D-PA). The acknowledged king of earmarks in the
House gains the attention of the New York Times editorial board today, which
notes the cozy and lucrative relationship between more than two dozen
contractors in Murtha's district and the hundreds of millions of dollars in pork
he provided them. It also highlights what roughly amounts to a commission on the
sale of Murtha's power as an appropriator: Mr. Murtha led all House members this
year, securing $162 million in district favors, according to the watchdog group
Taxpayers for Common Sense. ... In 1991, Mr. Murtha used a $5 million earmark to
create the National Defense Center for Environmental Excellence in Johnstown to
develop anti-pollution technology for the military. Since then, it has garnered
more than $670 million in contracts and earmarks. Meanwhile it is managed by
another contractor Mr. Murtha helped create, Concurrent Technologies, a research
operation that somehow was allowed to be set up as a tax-exempt charity,
according to The Washington Post. Thanks to Mr. Murtha, Concurrent has boomed;
the annual salary for its top three executives averages $462,000. Edward Morrissey, Captain's Quarters, January 14, 2008 ---
http://www.captainsquartersblog.com/mt/archives/016617.php

In April, the New York State Comptroller, Thomas DiNapoli, issued a damning
report on the Empire State's financial practices. Albany's budgets, he observed,
increasingly employ "fiscal manipulations" to present a "distorted view of the
State's finances." Money shuffled among accounts to hide deficits, loans made by
the state to itself, and other maneuvers Mr. DiNapoli called a "fiscal shell
game" are meant to "mask the true magnitude of the State's structural budget
deficit."

The comptroller's report produced yawns. Last week, however, the Securities and
Exchange Commission (SEC) filed fraud charges against New Jersey for
misrepresenting its financial obligations, particularly its pension obligations,
and misleading investors in its bonds. New York—and many other states—had better
sit up and take notice.

The Citizens Budget Commission of New York recently measured states' obligations
against their economic resources. New Jersey was rated in the worst fiscal
shape, but it judged other states that employ questionable budget practices,
including New York, California, Illinois and Rhode Island, to be only marginally
better. Closer SEC scrutiny of these states' muni offerings should be welcomed
by investors, and also by taxpayers from whom legislators often try to hide the
true depth of fiscal problems until they grow unmanageable.

New Jersey is an object case in how such manipulations eventually backfire. The
problems go back nearly 15 years, to when the then-relatively healthy state
decided to borrow $2.8 billion and stick it in its pension funds in lieu of
making contributions from tax revenues. To make the gambit seem reasonable,
Trenton projected unrealistic annual investment returns—between 8% and 12% per
year—on the borrowed money. The maneuver temporarily made the funds seem
well-off.

In 2001, when legislators wanted to further enhance rich pension benefits, they
valued the state's plan at its richest point: 1999, when the system was flush
with borrowing and the tech bubble hadn't yet burst. The scheme proved
disastrous, of course, because the stock market has since gone sideways, and New
Jersey has achieved nowhere near the returns it needed on that borrowed money.

Meanwhile, New Jersey compounded its woes with other ploys. In 2004, the state
broke the cardinal rule of municipal budgeting when it borrowed nearly $2
billion to close a budget deficit, which is like borrowing on your credit card
to pay off your mortgage. (The state supreme court ruled this move
unconstitutional but allowed it to go forward anyway because it didn't want to
"disrupt" government operations.) Over time, New Jersey's combination of
overspending in its budget and underfunding of its pensions resulted in a tidal
wave of tax increases and spending cuts.

Now, even if Gov. Chris Christie can solve the state's long-term, structural
budget problems, New Jersey will have to find some $3 billion a year in new
revenues to begin contributing again to its pensions.

Municipal bondholders seem complacent in the face of such problems. They like to
assert that they have first dibs on any tax revenues. But New Jersey has written
so many "guarantees" into its constitution—whether regarding pensions or
citizens' right to a "quality" education—that sorting out the competing
interests in a fiscal crisis could keep the courts busy for years.

As alarming is how Jersey-style fiscal practices have proliferated in other
states.

The manipulations date back to the late 1970s, when taxpayer revolts produced
spending caps and constitutional limits on tax increases in states. Rather than
hew to these restrictions, politicians found increasingly inventive ways around
them.

State officials have acknowledged such practices are growing common. During the
2002 recession, a report by the National Association of State Budget Officers
admitted that states were employing "creative, innovative . . . adjustments" to
budgets. They include financing current operations with debt, moving money from
trust funds dedicated to specific tasks (like highway maintenance) into general
funds, and pushing payments to vendors into future fiscal years.

"The long-running use of gimmicks is part of the reason most state budgets are
in crisis today," noted Eileen Norcross of the Mercatus Center at George Mason
University in a recent study.

The federal government has served as enabler. Although the special tax-free
status it bestows on municipal bonds amounts to a subsidy, Washington does
little to enforce responsible budgeting. In its fiscal stimulus packages of 2009
and 2010, for instance, the federal government funneled hundreds of billions of
dollars to the states without regard for their fiscal practices, treating
irresponsibility in New Jersey and New York the same as prudence in, say, Texas
and Indiana.

California granted its workers big pension and benefit enhancements in 1999. As
in New Jersey, those benefits were based on unrealistic projections of
stock-market returns over the long term. Now the costs of those pension
enhancements—which have added some $4 billion annually to the state budget and
hundreds of millions more to municipal costs—have deepened Sacramento's fiscal
woes, which it is solving with more ploys, like pushing tax refunds and payments
to vendors into future years.

These maneuvers often don't make it into bond presentations. Like New Jersey,
Illinois used extensive borrowing—including a whopping $10 billion offering in
2003—to make its pensions appear well-funded. The state then skipped
contributions into the system for several years, creating additional funding
problems. A recent study by Joshua Rauh of Northwestern University projects that
Illinois's pension system is among a handful that, like New Jersey's, could run
out of money in the next decade.

Yet a presentation made by Illinois officials to potential investors in June
mentioned the pension borrowings only briefly, then painted a rosy picture of
the state's fiscal practices. "Does the state have the Will To Govern needed to
address its challenges?" the presentation asked. "YES" it answered in big, bold
letters. The presentation then touted modest pension reforms that the state had
enacted, even though legislators are doing little to ensure the system's
long-term viability.

The SEC should demand, at the very least, that states acknowledge the unease of
their own in-house experts. There is nothing in the nearly 200 pages of New
York's current disclosure document for investors, for instance, that hints at
the state comptroller's concerns over the direction of the state budget. In
refreshingly candid language, Mr. Napoli describes in his report a growing lack
of transparency, which hides the state's true fiscal condition, as a "deficit
shuffle."

If that's a new dance step, it's one that investors and taxpayers everywhere
need to work harder to ban. The SEC should help.

This Week
(August 20, 2010) in Securities LitigationFraud in offering: In the Matter of State of New
Jersey, Adm. Proc. File No. 3-14009 (Aug. 18, 2010) is the SEC’s first fraud
action against a state. The Order for Proceedings alleges fraud in violation of
Securities Act Section 17(a)(2) & (3) in connection with 79 municipal bond
offerings from August 2001 through April 2007 for $26 billion. The cases center
on the failure of the state to make certain disclosures regarding the financial
condition of two large pension funds, the Teachers’ Pension and Annuity Fund and
the Public Employees’ Retirement System. Specifically, the state created the
fiscal illusion, according to the SEC, that the two pension funds were being
adequately funded when in fact they were severely under funded. New Jersey was
aware of the underfunding, according to the Order, but took no steps to correct
the misleading documents used in connection with the bond offerings. During this
period, the state did not have any written policies and procedures regarding the
review or update of the bond offering documents and no training was given to its
employees regarding disclosure obligations. To resolve the proceeding the state
consented to the entry of a cease and desist order from commencing or committing
or causing any violations and any future violations of the Sections on which the
Order is basedhttp://www.secactions.com/

The WSJ is often my best source when I look for fraud reports and fraud
warnings.

Although Paul Williams likes to put down the Wall Street Journal, I
like to give some credit where credit is due.
The WSJ is making money at a time when most other newspapers are failing, and
this allows the WSJ to afford some of the best reporters in the world, many of
whom pride themselves on their independence and integrity.

Here is an old example followed by a new example.

Old Example
A dogged WSJ reporter deserves credit for the the first public arrow that
eventually brought down Enron's house of cards. If the WSJ was overly concerned
about the welfare of the largest corporations in the U.S., this reporter or his
employer would've buried this report.A WSJ reporter was the first to uncover Enron's secret "Related Party
Transactions." What reporter was this and what are those transactions that
he/she investigated?
Answer ---
http://www.trinity.edu/rjensen/FraudEnronQuiz.htm#22

Amid all the junk mail pouring into your house in
recent months, you might have noticed a solicitation or two for a
"professional card," otherwise known as a small-business or corporate credit
card.

If so, watch out. While Capital One Financial
Corp.'s World MasterCard, Citigroup Inc.'s Citibank CitiBusiness/AAdvantage
Mastercard and the others might look like typical plastic, they are anything
but.

Professional cards aren't covered under the Credit
Card Accountability and Responsibility and Disclosure Act of 2009, or Card
Act for short. Among other things, the law prohibits issuers from
controversial billing practices such as hair-trigger interest rate
increases, shortened payment cycles and inactivity fees—but it doesn't apply
to professional cards (see table).

Until recently professional cards largely had been
reserved for small-business owners or corporate executives. But since the
Card Act was passed in March 2009, companies have been inundating ordinary
consumers with applications. In the first quarter of 2010, issuers mailed
out 47 million professional offers, a 256% increase from the same period
last year, according to research firm Synovate.

The Card Act's strictures have squeezed banks'
profits and their ability to operate freely. By moving cardholders out of
protected consumer cards and into professional cards, banks might recoup
some of the revenue they have lost.

"By pushing professional cards to consumers who
otherwise wouldn't want them, card issuers can get around some of the
provisions of the Card Act," says Josh Frank, a senior researcher at the
Center for Responsible Lending, a consumer group.

Several solicitations from J.P. Morgan Chase & Co.
have ended up in the mailbox of John and Gloria Harrison, a retired military
couple who live in Destrehan, La., outside New Orleans. Mrs. Harrison says
she gets an offer for an Ink From Chase card, geared toward small
businesses, almost every month. She says she finds this puzzling because her
husband retired in 1986 and doesn't own a business.

In re New Century, Case No. CV 07-00931 (C.D. CA.)
is a securities class action arising out of the collapse of sub-prime lender New
Century. The defendants include a group of the former officers and directors of
the company, its outside auditors KPMG LLP
and underwriters J.P. Morgan Securities, Inc., Deutsche Bank Securities, Inc.
and Morgan Stanley & Co. This week the court gave preliminary approval to a $125
million settlement. The officers and directors will pay $65 million, KPMG $44.75
million and the underwriters $15 million.http://www.secactions.com/

Insider trading: SEC v. Gansman, Civil Action No.
08-CV-4918 (S.D.N.Y. Filed May 29, 2008) is an insider trading case against a
former attorney at the Transaction Advisory Services group of Ernst & Young, James
Gansman, and his former stock broker and close friend, Donna Murdoch. The
Commission alleged, as discussed here, that Mr. Gansman tipped Ms. Murdoch
concerning at least seven different acquisition targets of E&Y clients. Ms.
Murdoch traded in the securities of each and also tipped her father and
recommended trading in two stocks to others, all of who traded. Previously, Mr.
Gansman was convicted on parallel criminal charges and sentenced to serve a year
and a day in prison. Ms. Murdoch pleaded guilty to a seventeen-count superseding
information in December 2008 and is awaiting sentencing. To settle with the SEC,
each defendant consented to the entry of a permanent injunction prohibiting
future violations of Exchange Act Sections 10(b) and 14(e). Mr. Gansman also
agreed to pay disgorgement of $233,385 along with prejudgment interest while Ms.
Murdoch will disgorge $339,110 along with prejudgment interest. Mr. Gansman
consented to the entry of an order barring him from appearing or practicing as
an attorney before the Commission in a related administrative proceeding. Ms.
Murdoch agreed to the entry of an order barring her from association with any
broker or dealer in a related administrative proceeding.
http://www.secactions.com/

http://www.businessweek.com/news/2010-07-16/bank-of-america-citigroup-fall-as-loan-books-interest-shrink.html
"Citigroup also got $599 million of mark-ups on loans
and securities in a “special asset pool” of trading positions left over from
before the credit crisis. Citigroup booked a $447 million gain from writing
down the value of its own debt, under an accounting rule that allows
companies to profit when their creditworthiness declines. The rules reflect
the possibility that a company could buy back its own liabilities at a
discount, which under traditional accounting methods would result in a
profit.

About $1.2 billion of Bank of America’s revenue
came from writing down the value of obligations assumed from its purchase of
Merrill Lynch & Co., according to the bank’s CFO, Charles Noski."

Francine

Francine

July 19, 2010 reply from Bob Jensen

Hi Francine,

Bank behaviors with auditor blessings are so sad.

Thanks for the tidbit.

Sydney
Finkelstein, the Steven Roth professor of management at the Tuck School of
Business at Dartmouth College, also pointed out that Bank of America booked
a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it
acquired last quarter to prices that were higher than Merrill kept them.
“Although perfectly legal, this move is also perfectly delusional, because
some day soon these assets will be written down to their fair value, and it
won’t be pretty,” he said
"Bank Profits Appear Out of Thin Air ," by Andrew Ross Sorkin, The
New York Times, April 20, 2009 ---
http://www.nytimes.com/2009/04/21/business/21sorkin.html?_r=1&dbk

This is starting to feel like amateur
hour for aspiring magicians.

Another day, another attempt by a Wall
Street bank to pull a bunny out of the hat, showing off an earnings report
that it hopes will elicit oohs and aahs from the market. Goldman Sachs,
JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow
their audiences with what appeared to be — presto! — better-than-expected
numbers.

But in each case, investors spotted
the attempts at sleight of hand, and didn’t buy it for a second.

With Goldman Sachs, the disappearing
month of December didn’t quite disappear (it changed its reporting calendar,
effectively erasing the impact of a $1.5 billion loss that month); JPMorgan
Chase reported a dazzling profit partly because the price of its bonds
dropped (theoretically, they could retire them and buy them back at a
cheaper price; that’s sort of like saying you’re richer because the value of
your home has dropped); Citigroup pulled the same trick.

Bank of America sold its shares in
China Construction Bank to book a big one-time profit, but Ken Lewis
heralded the results as “a testament to the value and breadth of the
franchise.”

Sydney Finkelstein, the Steven Roth
professor of management at the Tuck School of Business at Dartmouth College,
also pointed out that Bank of America booked a $2.2 billion gain by
increasing the value of Merrill Lynch’s assets it acquired last quarter to
prices that were higher than Merrill kept them.

“Although perfectly legal, this move is
also perfectly delusional, because some day soon these assets will be
written down to their fair value, and it won’t be pretty,” he said.

Investors reacted by throwing
tomatoes. Bank of America’s stock plunged 24 percent, as did other bank
stocks. They’ve had enough.

Why can’t anybody read the room here?
After all the financial wizardry that got the country — actually, the world
— into trouble, why don’t these bankers give their audience what it seems to
crave? Perhaps a bit of simple math that could fit on the back of an
envelope, with no asterisks and no fine print, might win cheers instead of
jeers from the market.

What’s particularly puzzling is why
the banks don’t just try to make some money the old-fashioned way. After
all, earning it, if you could call it that, has never been easier with a
business model sponsored by the federal government. That’s the one in which
Uncle Sam and we taxpayers are offering the banks dirt-cheap money, which
they can turn around and lend at much higher rates.

“If the federal government let me
borrow money at zero percent interest, and then lend it out at 4 to 12
percent interest, even I could make a profit,” said Professor Finkelstein of
the Tuck School. “And if a college professor can make money in banking in
2009, what should we expect from the highly paid C.E.O.’s that populate
corner offices?”

But maybe now the banks are simply
following the lead of Washington, which keeps trotting out the latest idea
for shoring up the financial system.

The latest big idea is the so-called
stress test that is being applied to the banks, with results expected at the
end of this month.

This is playing to a tough crowd that
long ago decided to stop suspending disbelief. If the stress test is done
honestly, it is impossible to believe that some banks won’t fail. If no bank
fails, then what’s the value of the stress test? To tell us everything is
fine, when people know it’s not?

“I can’t think of a single, positive
thing to say about the stress test concept — the process by which it will be
carried out, or outcome it will produce, no matter what the outcome is,”
Thomas K. Brown, an analyst at Bankstocks.com, wrote. “Nothing good can come
of this and, under certain, non-far-fetched scenarios, it might end up
making the banking system’s problems worse.”

The results of the stress test could
lead to calls for capital for some of the banks. Citi is mentioned most
often as a candidate for more help, but there could be others.

The expectation, before Monday at
least, was that the government would pump new money into the banks that
needed it most.

But that was before the government
reached into its bag of tricks again. Now Treasury, instead of putting up
new money, is considering swapping its preferred shares in these banks for
common shares.

The benefit to the bank is that it
will have more capital to meet its ratio requirements, and therefore won’t
have to pay a 5 percent dividend to the government. In the case of Citi,
that would save the bank hundreds of millions of dollars a year.

And — ta da! — it will miraculously
stretch taxpayer dollars without spending a penny more.

Do you own stock in a large money center bank?
Work for one? Count on one to lend you money for a small business? Expect
them to stimulate the economy via commercial loans and lending again for
residential or commercial real estate?

You’ve been deluded by the illusion of their
self-serving public relations – rah-rah intended to help you forget
financial reform that barely is and no safety net for anyone but the elite.

The global money center banks are masters at
managing financial reporting. Regulators repeatedly feign surprise at
balance sheet sleight of hand, prestidigitation at the expert level intended
to buy time until the banks can grow out of the black hole that bubble
lending put them in. They announce their quarterly results, with all the
details – they don’t even try to hide them anymore – and they’re ignored or
the con is traded on for short term profits.

“Citigroup’s net income declined 37 percent, to
$2.7 billion, and Bank of America’s net income fell 3 percent, to $3.1
billion, from a year earlier. Both banks padded those results with a big
release of funds that had been set aside to cover future loan losses,
with executives citing improvements in the economy.”

Business Weekreports that Citigroup flip flopped
on the value of assets acquired with Merrill Lynch and magic happened:

“Citigroup also got $599 million of mark-ups on
loans and securities in a “special asset pool” of trading positions left
over from before the credit crisis. Citigroup booked a $447 million gain
from writing down the value of its own debt, under an accounting
rule that allows companies to profit when their
creditworthiness declines. The rules reflect the possibility that a
company could buy back its own liabilities at a discount, which under
traditional accounting methods would result in a profit.

About $1.2 billion of Bank of America’s revenue
came from writing down the value of obligations assumed from its
purchase of Merrill Lynch & Co., according to the bank’s CFO,
Charles Noski.”

Sydney Finkelstein, the Steven Roth
professor of management at the Tuck School of Business at
Dartmouth College, also pointed out that Bank of America
booked a $2.2 billion gain by increasing the value
of Merrill Lynch’s assets it acquired last quarter to prices
that were higher than Merrill kept them.

“Although perfectly legal, this move
is also perfectly delusional, because some day soon these
assets will be written down to their fair value, and it
won’t be pretty,” he said.

John Talbott, meanwhile,
explains todaywhy Treasury Secretary Tim Geithner
doesn’t want watchdog Elizabeth Warren as the head of the new post-reform
consumer protection agency – she’ll prevent banks from making money off the
little guy while lending and trading remain unreliable profit drivers.

“Hank Paulson, the Treasury Secretary at the
time, had announced that the $700 billion TARP funds would be used to
buy toxic assets like bad mortgage loans from the commercial banks. But
this never happened and now the amount of bad bank loans has increased
in the trillions. Immediately after receiving authorization of the
funding for TARP from Congress, Paulson reversed direction and decided
to make direct equity investments in the banks rather than using the
TARP funds to acquire their bad loans.

So where are the trillions of dollars of bad
loans that the banks had on their books? They are still there. The
Federal Reserve took possession temporarily of some of them as
collateral for lending to the banks in an attempt to clean up the banks
for their supposed” stress tests”. But as of now, the trillions of
dollars of underwater mortgages, CDO’s and worthless credit default
swaps are still on the banks books. Geithner is going to the familiar
“bank in crisis” playbook and hoping that the banks can earn their way
out of their solvency problems over time so the banks are continuing to
slowly write off their problem loans but at a rate that will take years,
if not decades, to clean up the problem.”

Paul Krugman predictedthis roller coaster ride
with bank earnings back in October, in particular with regard to Bank of
America and Citigroup. What he missed is that when trading profits are down
too, the banks – with the assistance of their auditors advice – must be
ever more creative to avoid having to write off those bad assets all at once
or without cover.

…while the wheeler-dealer side of the financial
industry, a k a trading operations, is highly profitable again, the part
of banking that really matters — lending, which fuels investment and job
creation — is not. Key banks remain financially weak, and their weakness
is hurting the economy as a whole.

You may recall that earlier this year there was
a big debate about how to get the banks lending again. Some analysts,
myself included, argued that at least some major banks needed a large
injection of capital from taxpayers, and that the only way to do this
was to temporarily nationalize the most troubled banks. The debate faded
out, however, after Citigroup and Bank of America, the banking system’s
weakest links, announced surprise profits. All was well, we were told,
now that the banks were profitable again.

But a funny thing happened on the way back to a
sound banking system: last week both Citi and BofA announced losses in
the third quarter. What happened?

Part of the answer is that those earlier
profits were in part a figment of the accountants’ imaginations.”

I’ve told you more than once that Citigroup is
still a mess. Anyone who isn’t a senior insider is nuts to buy their stock
or count on them for a job or business. Listen to me talk about AIG, Bank of
America and Citigroup, “an accident waiting to happen,” at the 8:15 mark on
this video for Stocktwits TV recorded June 3, 2010.

. . .

Both AIG and Goldman Sachs executives have been
questioned recently by the Financial Crisis Inquiry Commission.. The
Commission seeks to “examine the causes, domestic and global, of the current
financial and economic crisis in the United States.” We’ve also seen Lehman
executives called to account by Congressional inquisitors.

But we’ve yet to see the auditors – Pricewaterhouse
Coopers (auditor of AIG, Goldman Sachs, and Freddie Mac), Ernst & Young
(auditor of Lehman) or KPMG (auditor of Citigroup, previously of
Countrywide, Wells Fargo and Wachovia and earlier of Fannie Mae) – called to
testify to explain their role in blessing fraudulent bank balance sheet
accounting.

The title is "An Empirical
Analysis of Auditor Independence in the Banking Insustry," but don't be
fooled by the title -- it's about manipulation of banks' loan loss reserves,
with an emphasis on how auditors bear upon that phenomenon. Kanagaretnam et
al. (2010) also cite most of the earlier studies on earnings management
involving bank loan loss reserves. Kiridan Kanagaretnam is at McMaster
University, Gopal Krishnan is at Lehigh University, and Gerald Lobo is at
the University of Houston.

I have briefly gone through this paper. Its main
thesis is that there is lack of an association between banks fiddling with
earnings via LLLP (loan loss provisions) and "unexpected" audit fees for
large banks, while for the small banks that association is strongly
negative. The authors consider this evidence of a relationship between audit
independence and earnings management at least in the case of smaller banks.
They provide a blizzard of regressions and other data.

The paper is interesting from a policy perspective,
and would be a great paper in a policy oriented economics journal. I am glad
for the authors that it got accepted. However, does it have a bearing on
accounting' practice beyond setting the regulators on a chase of auditors of
small banks? Does it give us a better way of computing LLP? Does it give us
a way of finding out the reliability of the LLP number? Does it even tell us
if the LLP numbers are more (or less) reliable for the larger banks? Does
the age distribution of the loan portfolio vary between the two types of
banks? What is the distribution of auditors between the two types of banks?
There are a host of questions that should be triggered by this thread. Of
course, the authors pick the hypothesis they want to study, but an
accounting or auditing orientation (as opposed to "about" accounting
orientation in Sterling's language) would make a lot more sense for is
accountants.

The other issue, endemic to most of these types of
papers is the oblique way of introducing causality (a definite no-no for a
positivist) to obfuscate discussions. Figure 1 in the paper is what is
usually called a path graph giving the trace of causality (the direction of
the arrows indicating causality), but the statistical analysis is entirely
associational. Statistical techniques have existed for causal analysis for
almost half a century, but accounticians have uniformly pretended they do
not exist. Stating the models in causal terms but testing them
associationally is certainly less than truthful advertising. Unless, of
course, I am misstating the model, which I doubt. I have been in this game
for too long.

Nothing I have said above should be construed as
indicating my doubt on the questions raised by the authors; they should be
of great interest to a policy oriented audience. It is just that when it
comes to accounting practice, they are trying to sell kryptonite or worse.

SUMMARY: "The
boyfriend of a former Walt Disney Co. administrative assistant admitted to
engaging in a scheme to sell early access to the company's earnings
report..." Yonni Sebbag was arrested in May after contacting more than a
dozen hedge funds and investment companies anonymously in March. FBI agents
posing as hedge-fund traders paid $15,000 to Mr. Sebbag for early access to
the earnings information.

CLASSROOM APPLICATION: The
article is useful to discuss inside information, ethics, and the Code of
Professional Conduct. The first related article describes another case of
access to different inside information. The second related article offers
arguments against regulating insider trading and was the subject of a
separate review in October 2009. Students may refer to it in answering the
last question of the review.

QUESTIONS:
1. (Introductory)
What is insider information?

2. (Introductory)
List the two items of inside information described in the main and related
articles. Describe how each of these pieces of information is of interest to
stock market participants.

3. (Advanced)
How often are practicing accountants privy to information such as the two
items listed in answer to question 2 above? What requirements must
practicing accountants follow in handling such information?

4. (Advanced)
Describe the differences in penalties against these three individuals. Why
were they so different? Do you agree with the differing levels of penalty?

5. (Advanced)
Do you think there could ever be a case in which it is ethical to act on
inside information? Support your answer.

The boyfriend of a former Walt Disney Co.
administrative assistant admitted to engaging in a scheme to sell early
access to the company's earnings report in U.S. district court in Manhattan
Monday.

Yonni Sebbag, 30 years old, and his girlfriend
Bonnie Hoxie, the former assistant to Disney's head of communications,
allegedly contacted more than a dozen hedge funds and investment companies
anonymously in March, offering to provide an early look at Disney's
earnings.

"Mr. Sebbag has come forward and admitted full
responsibility for his conduct," Mr. Kartagener said. "I think the
foundation of this guilty plea is a fair basis to go forward and ultimately
resolve this matter."

Prosecutors from the U.S. Attorney's office in
Manhattan had alleged that after Mr. Sebbag sent the anonymous letters, he
was contacted by FBI agents posing as hedge-fund traders and he agreed to
give them early access to Disney's earnings. Mr. Sebbag received $15,000 in
cash from the agents for sharing the inside information, the prosecutors
said.

In court Monday, Assistant U.S. Attorney Julian
Moore said prosecutors have video and audio recordings of Mr. Sebbag meeting
with the undercover agents and would have presented those recordings as
evidence if the case had gone to trial.

The anonymous letters offered to share information
about the company's second-quarter earnings report before its release in May
and asked those who were interested to contact an email account, according
to the criminal complaint in the matter.

Ms. Hoxie has been charged with wire fraud and
conspiracy to commit securities fraud. She is currently free on bail, which
was set at $50,000 in June. Her lawyer, Robert Baum, didn't immediately
return a phone call seeking comment Monday.

The U.S. Securities and Exchange Commission has
brought separate civil charges in the matter that are still pending. It
alleges that Ms. Hoxie laid claim to a portion of the illicit profits Mr.
Sebbag hoped to gain from the tip, sending him a picture of an expensive
Stella McCartney designer handbag that cost $700.

Mr. Sebbag allegedly responded that he would get
her the bag "next week" and that "I may be able to [buy] u 2 of them, lol,"
the SEC said. Ms. Hoxie responded, "In that case, i also love love these
shoes" and attached a picture of a pair of expensive Stella McCartney shoes,
according to the SEC.

The SEC said at least 20 hedge funds in the U.S.
and Europe received the letters.

And in the naked light I saw
Ten thousand people maybe more
People talking without speaking
People hearing without listening
People writing songs that voices never shared
No one dared
Disturb the sound of silence

It’s no coincidence that settlements were announced
less than a week apart for both New Century and Countrywide. As two of the
earliest subprime failures, all parties were probably anxious to clear some
clutter and make room for other matters.

Fortune, August 3, 2010: A federal judge
signed offMonday on a settlement under which
former shareholders of the troubled mortgage [originator] will get $624
million, the Los Angeles Times reported. The plaintiff lawyers
called the sum the largest shareholder settlement since the mortgage
meltdown started in 2007.

Bank of America (BAC),
which acquired the mortgage lender two years ago
and has since stopped using the Countrywide name, will pay $600 million
and accounting firm KPMG will pay $24 million.

The Countrywide settlement comes just days
after officers and directors in another big
subprime class action agreed to pay $90
million to settle claims in that case. New Century co-founder Brad
Morrice said then that he
hoped the settlement “would make up for some of the losses suffered and
provide closure to me and the shareholders.”

Closure isn’t coming any time soon for
Countrywide. Bank of America’s
annual reportprovides a list of legal cases
tied to Countrywide that covers parts of three pages.

Nor is [Angelo] Mozilo [Countrywide former CEO]
out of the woods. He and two other former Countrywide execs still face a
Securities and Exchange Commission
fraud suitthat centers on familiar
allegations, that the company duped shareholders by failing to disclose
the growing risk of its subprime lending business.

Countrywide was not, strictly speaking, a failure.
Bank of America agreed to buy them in January of 2008, before the bigger
“failures” of Lehman, AIG, and Bear Stearns changed the language describing
our economic challenges from subprime crisis to full-blown,
“is-it-a-second-coming-of-the-depression-well-at-least-it’s-a-serious-recession”
financial crisis.

Reuters, January 11, 2008: “Regulators and
politicians in Washington are very keen to see troubled lenders find
solutions to their problems, experts said. Egan said the Federal Deposit
Insurance Corp did not want to deal with the potential failure of
Countrywide. And Bove said: “The people in Washington must be having
fits about what would happen if a bank or a thrift with $55 billion in
assets went under, so I think they pushed Countrywide hard in this
direction.”

“Countrywide, the nation’s biggest mortgage
lender in terms of loan volume, said it faces “unprecedented
disruptions” in debt and mortgage-finance markets that could hurt
earnings and the company’s financial condition. In its quarterly filing
with the SEC, the bank said “the situation is rapidly evolving and the
impact on the company is unknown.”

Countrywide Financial Corp.’s mortgage
portfolio continues to deteriorate rapidly as defaults increase and home
prices fall, a securities filing shows…The lender also said it took a
big loss in the fourth quarter on home-equity lines of credit. Further
losses may lie ahead…Countrywide was blindsided during the quarter by
obligations on home-equity lines of credit that it had sold to investors
in the form of securities…Countrywide said the likelihood of
such a situation was “deemed remote” until late 2007. It blamed
a “sudden deterioration” in the housing market. As a result, it recorded
a $704 million loss to cover the estimated costs of its obligations on
the lines of credit…A
Countrywide computer model used to gauge risks
on these securities didn’t take into account the possible effects of
exceeding the loss levels that cut off reimbursements…

Much has been written about Countrywide and its
failings. There was enough evidence, I suppose,
in re Countrywide Financial Corp. Securities Litigation, 07-05295 that “former
Countrywide Chief Executive Officer Angelo Moziloand other executives
hid the fact that the company was fueling its growth by letting underwriting
standards deteriorate” to scare the
defendants away from a trial. Mozilo is still subject to SEC civil suits
and potential criminal indictments for fraud. But Countrywide, its
executives and its auditors, KPMG, were not subjected to a bankruptcy filing
and a bankruptcy examiner’s report like New Century was.

The judge in the Countrywide case has agreed to
accept KPMG’s acknowledgment of $24 million of the $624 million liability or
about 4% culpability. Without a bankruptcy examiner’s report such as the New
Century report or a trial, we will never know the full extent, if any, of
KPMG’s knowledge, negligence,
aiding or abetting of the alleged Countrywide
fraud.

Michael Missal’s New Century bankruptcy examiner
report was a tour de force, the complete anatomy of a pre-financial crisis
fraud, including several smoking guns pointed at auditors KPMG. Let me
remind you that pros like
Mr. Missal, who cut his teeth on the World Com
bankruptcy and Arthur Andersen, drew the map used by Anton Valukas and the
Lehman bankruptcy examiner’s report. Missal set the standard for Valukas’ colorable
claims against Ernst and Young for
professional impotence and complacency when faced with Lehman’s Repo 105
activities.

Paul Barrett of Business Weekreminded us, too, of
the important role of the virtuoso bankruptcy examination when setting up
Trustees’ litigation and criminal indictments:

“The unavoidable question is whether the SEC
will hold someone responsible for what happened at Lehman,” says Michael
J. Missal, a partner in Washington with the law firm K&L Gates. Missal,
who makes a living defending companies faced with government
investigations, is another of those attorneys capable, when asked by a
court, of transforming himself into a public-spirited, if generously
compensated, pit bull. He published an impressive bankruptcy examiner’s
report of his own in 2008 in the case of New Century Financial, one of
the subprime mortgage giants that, with Wall Street’s assistance,
recklessly inflated the housing bubble.

I spoke to Michael Missal recently. He told me
that to have a successful bankruptcy examiner’s engagement, the examiner
must be:

1) Thorough

2) Accurate

3) Fair

4) Objective

5) Timely

I think his New Century report, clocking in at 551
pages plus appendices, did a great job of explaining, for the first time,
difficult issues we would see so many times in later subprime and financial
crisis litigation.

Bloomberg, April 2, 2009: KPMG’s audits of New
Century violated both professional standards promoted by its
international body and regulatory requirements, according to the
complaint. Dissenters within the auditing firm were silenced by senior
partners to protect the firm’s business relationship with New Century
and KPMG LLP’s fees from the company.

One KPMG specialist who complained about an
incorrect accounting practice on the eve of the company’s 2005 annual
report filing was told by a lead KPMG audit partner “as far as I am
concerned we are done. The client thinks we are done. All we are going
to do is piss everybody off,” the complaint said.

Expensive Underwear: Ex-Dean Accused of Stealing $1 Million From St.
John’sAmong the many jobs performed by college
administrators, Cecilia Chang’s was at once challenging and glamorous. As dean
of the Institute of Asian Studies at St. John’s University in Queens, she
traveled the world soliciting donations, luring potential contributors with
sumptuous meals, entertainment and gifts, all of it paid for by the college. Her
expenses sometimes reached $50,000 a month. . . . On Wednesday, Ms. Chang,
57, was arrested at her 15-room colonial in Jamaica Estates and accused of
embezzling about $1 million from the university, money that prosecutors said she
used to pay for lingerie, trips to casinos and her son’s tuition bills . . .
As part of her scheme, prosecutors said, Ms. Chang siphoned a $250,000 donation
from a Saudi prince’s foundation into a nonprofit organization she had created
ostensibly for the university but that, in fact, was a personal piggy bank.
Fernanda Santos, "Ex-Dean Accused of Stealing $1 Million From St. John’s,"
Chronicle of Higher Education, September 15, 2010 ---
http://www.nytimes.com/2010/09/16/nyregion/16scam.html?_r=1&hpw

Abstract:
In the spring of 2009, public outcry erupted over the multi-million dollar
bonuses paid to AIG executives even as the company was receiving TARP funds.
Various measures were proposed in response, including a 90% retroactive tax
on the bonuses, which the media described as a "clawback." Separately, the
term "clawback" was also used to refer to remedies potentially available to
investors defrauded in the multi-billion dollar Ponzi scheme run by Bernard
Madoff. While the media and legal commentators have used the term "clawback"
reflexively, the concept has yet to be fully analyzed. In this article, we
propose a doctrine of clawbacks that accounts for these seemingly variant
usages. In the process, we distinguish between retroactive and prospective
clawback provisions, and explore the implications of such provisions for
contract law in general. Ultimately, we advocate writing prospective
clawback terms into contracts directly, or implying them through default
rules where possible, including via potential amendments to the law of
securities regulation. We believe that such prospective clawbacks will
result in more accountability for executive compensation, reduce inequities
among investors in certain frauds, and overall have a salutary effect upon
corporate governance.

On October 14, 2008, Secretary of the Treasury
Paulson and President Bush separately announced revisions in the TARP
program. The Treasury announced their intention to buy senior preferred
stock and warrants in the nine largest American banks. The shares would
qualify as Tier 1 capital and were non-voting shares. To qualify for this
program, the Treasury required participating institutions to meet certain
criteria, including: "(1) ensuring that incentive compensation for senior
executives does not encourage unnecessary and excessive risks that threaten
the value of the financial institution; (2) required clawback of any bonus
or incentive compensation paid to a senior executive based on statements of
earnings, gains or other criteria that are later proven to be materially
inaccurate; (3) prohibition on the financial institution from making any
golden parachute payment to a senior executive based on the Internal Revenue
Code provision; and (4) agreement not to deduct for tax purposes executive
compensation in excess of $500,000 for each senior executive." The Treasury
also bought preferred stock and warrants from hundreds of smaller banks,
using the first $250 billion allotted to the program.

The first allocation of the TARP money was
primarily used to buy preferred stock, which is similar to debt in that it
gets paid before common equity shareholders. This has led some economists to
argue that the plan may be ineffective in inducing banks to lend
efficiently.[15][16]

In the original plan presented by Secretary
Paulson, the government would buy troubled (toxic) assets in insolvent banks
and then sell them at auction to private investor and/or companies. This
plan was scratched when Paulson met with United Kingdom's Prime Minister
Gordon Brown who came to the White House for an international summit on the
global credit crisis.[citation needed] Prime Minister Brown, in an attempt
to mitigate the credit squeeze in England, merely infused capital into banks
via preferred stock in order to clean up their balance sheets and, in some
economists' view, effectively nationalizing many banks. This plan seemed
attractive to Secretary Paulson in that it was relatively easier and
seemingly boosted lending more quickly. The first half of the asset
purchases may not be effective in getting banks to lend again because they
were reluctant to risk lending as before with low lending standards. To make
matters worse, overnight lending to other banks came to a relative halt
because banks did not trust each other to be prudent with their
money.[citation needed]

On November 12, 2008, Secretary of the Treasury
Henry Paulson indicated that reviving the securitization market for consumer
credit would be a new priority in the second allotment

From The Wall Street Journal Accounting Weekly Review on August 13, 2010

SUMMARY: During
the settlement with Dell, Inc. in which founder Michael Dell agreed to pay a
$4 million penalty without admitting or denying wrongdoing, Commissioner
Luis Aguilar raised the issue of "clawing back" compensation to executives
based on inflated earnings. "The SEC alleged Mr. Dell hid payments from
Intel Corp. that allowed the company to inflate earnings....Under [Section
304 of the 2002 Sarbanes-Oxley law], the SEC can seek the repayment of
bonuses, stock options or profits from stock sales during a 12-month period
following the first time the company issues information that has to be
restated." The SEC has been working on a formal policy to guide them in
cases in which an executive has not been accused of personal wrongdoing,
"but hammering out a policy acceptable to the five-member Commission...may
be difficult." The related article announced the clawback provision when it
was enacted into law in July and compares it to the previous requirements
related to executive compensation under Sarbanes-Oxley.

QUESTIONS:
1. (Introductory)
Based on the main and related article, define and describe a "clawback"
policy.

2. (Introductory)
Why will most publicly traded companies implement change as a result of the
new law and resultant SEC requirements?

3. (Advanced)
When must a company restate previously reported financial results? Cite the
authoritative accounting literature requiring this treatment.

4. (Advanced)
Describe one executive compensation plan impacted by reported financial
results. How would such a plan be impacted by a restatement?

5. (Introductory)
What is the difficulty with applying the new clawback provisions to
executive stock option plans? Based on the related article, how are
companies solving this issue?

6. (Advanced)
Is it possible that executives who are innocent of any wrongdoing could be
affected financially by these new clawback provisions? Do you think that
such executives should have to repay to their companies compensation amounts
received in previous years? Support your answer.

7. (Advanced)
Refer to the main article. Consider the specific case of Dell Inc. founder
Michael Dell. Do you believe Mr. Dell should have to return compensation to
the company? Support your answer.

8. (Introductory)
How do the new requirements under the financial reform law enacted in July
exceed the requirements of Sarbanes-Oxley? In your answer, include one or
two statements to define the Sarbanes-Oxley law.

A dispute over how to claw back pay from executives
at companies accused of cooking the books is roiling the Securities and
Exchange Commission.

Commissioner Luis Aguilar, a Democrat, has
threatened not to vote on cases where he thinks the agency is too lax,
people familiar with the matter said. That prompted the SEC to review its
policies for the intermittently used enforcement tool.

"The SEC ought to use all the tools at its disposal
to try to seek funds for deterrence," Mr. Aguilar said in an interview on
Tuesday. "It's important for us to the extent possible to try to deter, and
part of that means using tools Congress has given us."

The issue of clawbacks came up during the SEC's
recent settlement with Dell Inc. and founder Michael Dell, people familiar
with the matter said.

The SEC alleged Mr. Dell hid payments from Intel
Corp. that allowed the company to inflate earnings. He agreed to pay a $4
million penalty to settle the case without admitting or denying wrongdoing,
but didn't return any pay.

Mr. Aguilar initially objected to the Dell
settlement, according to people familiar with the matter. It is unclear
whether the penalty—considered high by historical standards for an
individual—swayed Mr. Aguilar's vote or whether he removed himself from the
case.

In the interview, Mr. Aguilar spoke generally about
clawbacks and declined to discuss Dell or other specific cases.

A spokesman for the SEC declined to comment.

Section 304 of the 2002 Sarbanes-Oxley law gave the
SEC the ability to seek reimbursement of compensation from the chief
executive and chief financial officer of a company when it restates its
financial statements because of misconduct.

Under the law, the SEC can seek the repayment of
bonuses, stock options or profits from stock sales during a 12-month period
following the first time the company issues information that has to be
restated.

Last year, the SEC used the tool for the first time
against an executive who wasn't accused of personal wrongdoing.

In that case the SEC sued Maynard Jenkins, the
former chief executive of CSK Auto Corp., for $4 million in bonuses and
stock sales. Mr. Jenkins is fighting the allegations.

SEC attorneys have been working on a more formal
policy to guide them in such cases, people familiar with the matter said.
They were seeking to tie the amount of the clawback to the period of
wrongdoing, these people said.

Mr. Aguilar felt the emerging new policy wasn't
stringent enough and told the SEC staff he would recuse himself from cases
when he didn't agree with the enforcement staff's recommendations, the
people said.

Amid the standoff, SEC enforcement chief Robert
Khuzami has halted the initial policy and set up a committee to take another
look at the matter, the people said.

Hammering out a policy acceptable to the
five-member commission, which has split on recent high-profile cases, may be
difficult.

The divisions worry some within the SEC because the
absence of an agreement could affect cases in the pipeline, especially on
close calls where Mr. Aguilar's vote might be necessary to go forward.

Mr. Aguilar's hard line on clawbacks was bolstered
by the Dodd-Frank law, signed by President Obama on July 21. It says stock
exchanges need to change listing standards to require companies to have
clawback policies in place that go further than the Sarbanes-Oxley policy.

Section 954 of the law says that pay clawbacks
should apply to any current or former employee and instructs companies to
seek pay earned during the three-year period before a restatement "in excess
of what would have been paid to the executive under the accounting
restatement."

Since becoming a commissioner in late 2008, Mr.
Aguilar has called for a tougher enforcement approach, including a rework of
the agency's policy of seeking penalties against companies.

In a speech in May, Mr. Aguilar took up the issue
of executive pay in the context of the SEC's lawsuit against Bank of America
Corp. for failing to disclose to shareholders the size of bonuses paid to
Merrill Lynch executives. The bank agreed to pay $150 million to settle the
matter.

Mr. Aguilar said that penalty "pales" in comparison
to the $5.8 billion in bonuses paid during the merger.

"Perhaps what should happen is that, when a
corporation pays a penalty, the money should be required to come out of the
budget and bonuses for the people or group who were the most responsible,"
he said.

Under questioning at a hearing of the Senate
Banking Committee on Wednesday, the Securities and Exchange Commission's
inspector general told lawmakers that he's "had discussions with criminal
authorities about whether there would be any criminal action arising because
of that."

In a report issued earlier this year, Inspector
General David Kotz wrote that Spencer C. Barasch had "a significant role" in
decisions over the years not to formally investigate Stanford, who is
accused of bilking investors out of $8 billion. The Houston businessman has
pleaded not guilty.

The report said that some SEC examiners thought as
early as 1997 that Stanford's financial empire was built on a Ponzi scheme.

"If you don't get the Justice Department involved
in this, shame on you as the inspector general," said Sen. Jim Bunning, R-Ky.
"That, to me, is criminal negligence. And the sooner they get him before a
U.S. court, the better I will like it."

Barasch remains a partner in the Dallas office of
Andrews Kurth. Bob Jewell, the firm's managing partner, said Wednesday that
Kotz's testimony was "disappointing" and that Barasch "served the SEC with
honor, integrity and distinction."

"We disagree with the characterization of Mr.
Barasch's involvement put forth by the inspector general," Jewell said in a
prepared statement. "We believe he acted properly during his contacts with
the Stanford Financial Group and the Securities and Exchange Commission. He
did not violate conflicts of interest."

Kotz also reported that Barasch, who left the SEC
in 2005, later represented Stanford before the SEC despite ethics laws
against doing so. An SEC spokesman confirmed that the agency's ethics office
referred the matter to the State Bar of Texas to consider whether Barasch
committed any professional misconduct.

A spokeswoman for the State Bar said such
grievances remain confidential unless a district court or grievance panel
sanctions the lawyer.

Many senators at Wednesday's hearing appeared to be
grappling with Kotz's report for the first time.

The SEC made the report public on the same day in
April that it charged Goldman Sachs with fraud, a case that got far more
attention in the media. Several senators questioned whether the timing was
an attempt to reduce public attention to the inspector general's
embarrassing report.

The report said that SEC examiners in Fort Worth
thought as early as 1997 that Stanford might be operating a Ponzi scheme and
referred the matter to the enforcement staff. A manager who was leaving the
agency told her boss that year that Stanford's business "looks like a Ponzi
scheme to me, and someday it's going to blow up," according to Kotz's
report.

However, the enforcement staff opened and closed
its case after Stanford refused to voluntarily produce any records. Led by
Barasch, the enforcement staff didn't open investigations after three other
examinations in 1998, 2002, and 2004 all concluded that Stanford's
certificates of deposit were probably a Ponzi scheme or other type of fraud.

"Any way you look at it, this is a colossal failure
of the SEC," said Sen. Richard Shelby, D-Ala.

The SEC charged Stanford and three of his firms
with fraud and other securities violations in February 2009. Rose Romero,
the regional director of the SEC in Fort Worth, told lawmakers Wednesday
that the SEC has notified other former Stanford employees that it intends to
seek fraud charges against them. The group includes "former high level
executives and financial advisers," Romero said.

Kotz said that Barasch and other enforcement
attorneys believed the Stanford case was too complex and would absorb too
many resources. The group believed that Washington judged regional offices
based on how many cases they brought, which led them to pursue easier cases,
Kotz said.

The officials said they were implementing several
changes to their enforcement priorities, including placing more emphasis on
cases that affect a substantial number of investors. The SEC also said it
has increased coordination between its examiners -- who originally suspected
the Stanford fraud -- and its enforcement staff.

Robert Khuzami, the SEC's director of enforcement,
told the panel that his staff has focused on complex accounting and
securities cases, particularly since the credit crisis of 2008.

"If you look at the course of cases that we have
brought in the last 18 months, particularly across the credit crisis -- New
Century, Countrywide, Goldman, Dell, State Street, Evergreen, ICP,
Citigroup, Bank of America -- these are hugely complicated accounting fraud,
structured product cases," Khuzami said.

"We're not getting quick stats on those cases, I
assure you."

From The Wall Street Journal Accounting Weekly Review on September 10,
2009

SUMMARY: "The
SEC's inspector general released the full 477-page version of his report on
how the SEC missed red flags on [Bernard Madoff]....and details just how
many opportunities there were for examiners to find the fraud and how
bungled their efforts were." For example, "one anonymous complaint directed
the SEC to a 'scandal of major proportion' by the Madoff firm and said
assets of a specific investor 'have been 'co-mingled' with funds controlled
by the Madoff firm. The SEC called Mr. Madoff's lawyer and had him ask Mr.
Madoff if he managed money for that investor. When the lawyer said Madoff
didn't, the complaint wasn't pursued further. The IG report concludes that
'accepting the word of a registrant who is alleged to be engaged in a
specific instance of fraud is an inadequate investigation'....SEC Chairman
Mary Schapiro said, 'In the coming weeks, we will continue to closely review
the full report and learn every lesson we can to help build upon the many
reforms we have already put into place since January.'"

CLASSROOM APPLICATION: The
article makes clear the need for auditing roles at the SEC as well as in
public accounting firms auditing general purpose financial statements.

QUESTIONS:
1. (Introductory)
What is a "Ponzi Scheme"? When was Mr. Madoff convicted of running such a
scheme? How did this scheme impact Madoff's investors?

2. (Introductory)
Who issued the report on the SEC's failure to uncover the Madoff scheme
before it collapsed and he himself admitted to the crime?

3. (Advanced)
What did "an unnamed hedge-fund manager" say in an email to the SEC? Explain
how each of the points listed in the email indicate the possibility of a
Ponzi scheme in operation.

4. (Introductory)
What is "front-running" in trading? How did a senior examiner explain this
trading activity as his choice of action to investigate in Mr. Madoff's
operations?

5. (Advanced)
How do you think a choice of action in examination should be determined if
the SEC receives a credible indication of possible fraud in operating an
investment firm such as Mr. Madoff's? How should this choice drive the
determination of expertise needed on an investigatory team?

6. (Advanced)
What audit step failure was evident in the SEC investigatory actions
undertaken between December 2003 and March 2004, as described in the
article?

7. (Introductory)
What expertise do you think was needed on the investigative teams handling
the Madoff case, at least as described in this article?

New Hints at Why the SEC Failed to Seriously Investigate Madoff's Hedge
Fund
After being repeatedly warned for six years that this was a criminal scam
It's beginning to look like a family "affair"

(The SEC's) Swanson later married Madoff's niece,
and their relationship is now under review by the SEC inspector general, who is
examining the agency's handling of the Madoff case, the Post reported. Swanson,
no longer with the agency, declined to comment, the Post said.
"SEC lawyer raised alarm about Madoff: report," Reuters, July 2, 2009 ---
http://news.yahoo.com/s/nm/20090702/bs_nm/us_madoff_sec
The Washington Post account is at ---
Click Here

A U.S. Securities and Exchange Commission lawyer
warned about irregularities at Bernard Madoff's financial management firm as
far back as 2004, The Washington Post reported on Thursday, citing agency
documents and sources familiar with the investigation.

Genevievette Walker-Lightfoot, a lawyer in the
SEC's Office of Compliance Inspections and Examinations, sent emails to a
supervisor saying information provided by Madoff during her review didn't
add up and suggesting a set of questions to ask his firm, the report said.

Several of the questions directly challenged Madoff
activities that turned out to be elements of his massive fraud, the
newspaper said.

Madoff, 71, was sentenced to a prison term of 150
years on Monday after he pleaded guilty in March to a decades-long fraud
that U.S. prosecutors said drew in as much as $65 billion.

The Washington Post reported that when
Walker-Lightfoot reviewed the paper documents and electronic data supplied
to the SEC by Madoff, she found it full of inconsistencies, according to
documents, a former SEC official and another person knowledgeable about the
2004 investigation.

The newspaper said the SEC staffer raised concerns
about Madoff but, at the time, the SEC was under pressure to look for
wrongdoing in the mutual fund industry. Walker-Lightfoot was told to focus
on a separate probe into mutual funds, the report said.

One of Walker-Lightfoot's supervisors on the case
was Eric Swanson, an assistant director of her department, the Post
reported, citing two people familiar with the investigation.

Swanson later married Madoff's niece, and their
relationship is now under review by the SEC inspector general, who is
examining the agency's handling of the Madoff case, the Post reported.

Swanson, no longer with the agency, declined to
comment, the Post said.

SEC spokesman John Nester also declined to comment,
citing the ongoing investigation by the agency's inspector general, the
newspaper said.

Our Main Financial Regulating Agency: The SEC Screw
Everybody Commission
One of the biggest regulation failures in history is the way the SEC failed to
seriously investigate Bernie Madoff's fund even after being warned by Wall
Street experts across six years before Bernie himself disclosed that he was
running a $65 billion Ponzi fund.

Between 2002 and 2008 Harry Markopolos repeatedly told
(with indisputable proof) the Securities and Exchange Commission that Bernie
Madoff's investment fund was a fraud. Markopolos was ignored and, as a result,
investors lost more and more billions of dollars. Steve Kroft reports.

I'm really surprised that the SEC survived after Chris
Cox messed it up so many things so badly.

As Far as Regulations Go

An annual report issued by
the Competitive Enterprise Institute (CEI) shows that the U.S. government
imposed $1.17 trillion in new regulatory costs in 2008. That almost equals the
$1.2 trillion generated by individual income taxes, and amounts to $3,849 for
every American citizen. According the 2009 edition of Ten Thousand Commandments:
An Annual Snapshot of the Federal Regulatory State, the government issued 3,830
new rules last year, and The Federal Register, where such rules are listed,
ballooned to a record 79,435 pages. “The costs of federal regulations too often
exceed the benefits, yet these regulations receive little official scrutiny from
Congress,” said CEI Vice President Clyde Wayne Crews, Jr., who wrote the report.
“The U.S. economy lost value in 2008 for the first time since 1990,” Crews said.
“Meanwhile, our federal government imposed a $1.17 trillion ‘hidden tax’ on
Americans beyond the $3 trillion officially budgeted” through the regulations.Adam Brickley,
"Government Implemented Thousands of New Regulations Costing $1.17 Trillion in
2008," CNS News, June 12, 2009 ---
http://www.cnsnews.com/public/content/article.aspx?RsrcID=49487

Jensen Comment
I’m a long-time believer that industries being regulated end up controlling the
regulating agencies. The records of Alan Greenspan (FED) and the SEC from Arthur
Levitt to Chris Cox do absolutely nothing to change my belief ---
http://www.trinity.edu/rjensen/FraudRotten.htm

How do industries leverage the regulatory agencies?
The primary control mechanism is to have high paying jobs waiting in industry
for regulators who play ball while they are still employed by the government. It
happens time and time again in the FPC, EPA, FDA, FAA, FTC, SEC, etc. Because so
many people work for the FBI and IRS, it's a little harder for industry to
manage those bureaucrats. Also the FBI and the IRS tend to focus on the worst of
the worst offenders whereas other agencies often deal with top management of the
largest companies in America.

Kenneth I. Starr, the New York investment adviser
who once counted Hollywood celebrities like Al Pacino, Martin Scorsese and
Sylvester Stallone as clients, pleaded guilty on Friday in Federal District
Court in Manhattan to charges that he diverted tens of millions of dollars
of his clients’ money to pay for his lavish lifestyle.

A money manager to the stars who frequented charity
events, high-profile parties and movie premieres in search of clients, Mr.
Starr, 66, wore a dark blue prison smock and appeared stooped and drawn as
he stood before Federal Magistrate Judge Theodore H. Katz and pleaded guilty
to one count each of wire fraud, money laundering and investment adviser
fraud.

Mr. Starr, who is not related to the special
prosecutor with the same name who investigated President Bill Clinton,
admitted that he stole $20 million to $50 million from his clients to use
for his own purposes.

Some of the money paid a multimillion-dollar legal
settlement with a former client while other money bought a sprawling $7.5
million Upper East Side condo complete with a lap pool and a 1,500
square-foot garden.

A plea agreement between Mr. Starr and the
government calls for a prison sentence of 10 to 12.5 years. But Federal
District Judge Shira A. Scheindlin, who is scheduled to sentence Mr. Starr
on Dec. 15, is not bound by that agreement and could impose a greater or
lesser penalty.

The government said it could also seek the
forfeiture of as much as $50 million in assets owned or controlled by Mr.
Starr and $50 million in restitution for his victims.

After the courtroom proceedings, a lawyer for Mr.
Starr, Flora Edwards, indicated that the forfeiture and restitution amounts
were under discussion but that they were likely to be “significantly less”
than $50 million.

“He’s assumed full responsibility for his conduct,”
Ms. Edwards said. “He made a colossal error in judgment that he recognizes.
He’s paying a very, very heavy price.”

In a statement, Preet Bharara, the United States
attorney in Manhattan, said, “Kenneth Starr’s is a tale of fiction and
fraud, in which he played the role of legitimate investment adviser to a
cast of unsuspecting victims.”

Mr. Starr was indicted in June on 23 counts,
including wire fraud, securities fraud, fraud by an investment adviser and
money laundering.

Clients relied on him to provide investment advice,
financial planning and even pay bills and help with tax filings, federal
prosecutors said in the indictment.

In federal court on Friday, Mr. Starr admitted that
his clients had “entrusted him” with their money, but that “from 2009 to
2010, instead of using my clients’ money as I promised, I knowingly used a
portion of the money for my own purposes,” he told the judge.

The stories in NYT and WSJ are coming out because the
documents that contain the evidence of the PwC knowledge of Cassano's
contentions in November, pre- the investors meeting in December, have just
been made public by the Financial Crisis Inquiry Commission. They make for
interesting reading for anyone with the interest, aptitude and patience.

Welcome to Episode 33 rpm of AIG and PwC and
the Big Bad Wolf, Goldman Sachs. In this episode we attempt to slow things
down and stop blaming our mother, I mean Goldman Sachs, for everything.

Let’s consider for a moment the unnaturally
close, preternatural relationship between AIG and PwC over the years. The
dramas these two have been through together evoke the classic dysfunctional
family, hell bent on destroying each other before they let anyone or
anything destroy any of them…

“For decades,”
Gretchen Morgenson tells uslast Saturday in the
New York Times, “Goldman and AIG had a long and fruitful relationship, with
AIG insuring billions in mortgage-related securities that Goldman Sachs
underwrote. When the mortgage market started to deteriorate in 2007,
however, the relationship went sour…”

Goldman bought insurance against an AIG failure
from large foreign and domestic banks, including
Credit Suisse($310 million),
Morgan Stanley($243 million) and JPMorgan Chase ($216
million). Goldman also bought $223 million in insurance on AIG from a
variety of funds overseen by
Pimco, the money management firm.

The Washington Post, May 2005: “The
relationship between PWC and AIG stretches back decades to when the firm
still was called Coopers & Lybrand, before its 1998 merger with Price
Waterhouse. Former AIG finance chief Howard I. Smith, who left the
company earlier this year under pressure for failing to cooperate with
regulators, spent almost two decades as an auditor at Coopers before
joining AIG in 1984.
Steven Bensinger, AIG’s new chief financial officer,
also started his career at Coopers & Lybrand.

In the lawsuit filed earlier this spring in
U.S. District Court in Manhattan, Petro, the Ohio attorney general,
alleges that PWC’s independence was “impaired” by these long-standing
ties and by nearly $137 million in audit and consulting fees it received
from AIG between 2000 and 2003.”

They also didn’t buy the excuses AIG made for PwC
at the time – that PwC had been kept in the dark – and claimed there were
enough red flags to pin some of the liability on the auditor.

“In a boost to PWC, AIG in its release this spring also explicitly
told investors that auditors and board members had been kept in the dark
by management about some AIG accounting maneuvers, including the
company’s dealings with Capco Reinsurance Co. Ltd., a Barbados
reinsurance firm, and Union Excess Reinsurance Co. Ltd.”

In the latest scandal at AIG, we’ve seen PwC and
AIG’s most senior executives such as former CEO Sullivan and CFO Bensinger
attempt to divert attention from themselves. One example is the accusation
against Joseph Cassano. Mr. Cassano, albeit not the most likeable guy for
numerous reasons, seems to have done everything he could to get it through
the thick heads of PwC, Sullivan and Bensinger that there were wolves at
AIG’s door, even though Cassano believes even now
that enough time and a suitably stubborn attitude could have fought them
off.

Prosecutors… interviewed AIG senior management
and the company’s external auditor, and came away thinking Mr. Cassano
hadn’t properly disclosed multi-billion-dollar accounting changes that
drastically cut the size of estimated losses, these people said…In
interviews in 2008, Mr. Ryan told prosecutors he sometimes couldn’t get
straight answers from Mr. Cassano when he asked him to justify how AIG
accounted for the swaps, these people said…Senior executives at AIG’s
parent company voiced similar misgivings to prosecutors a couple of
years ago…However, Cassano was able to prove that he gave both PwC and
Sullivan/Bensinger enough of a heads up to make their own decision what
to tell investors in December.

{…}

The defense team rebutted the prosecution’s
allegations, presenting a version of events that portrayed Mr. Cassano
as repeatedly disclosing bad news to his bosses, investors and PwC…its
efforts helped focus prosecutors’ attention on an obscure set of
handwritten notes in their files, found scrawled on the bottom of a
printed spreadsheet…the annotations, which were made by a PwC partner at
a meeting with Mr. Cassano and AIG management a week before the key
December 2007 investor conference…Prosecutors realized the notes were
disastrous to their case… Mr. Cassano had in fact disclosed the size of
the accounting adjustments to both his bosses and external auditors.

It wasn’t really news when the
Wall Street Journalwrote about auditors’
“scribbled notes that scuttled the AIG probe” and the
New York Times Deal Book followed with a “me too”
blurb the next day. We’ve known since
late Maythat the Department of Justice no longer
had a case against Cassano. He had apparently told the auditors and his
bosses everything.

The investigations went south when,
“prosecutors found evidence Mr. Cassano did make key disclosures. They
obtained notes written by a PwC auditor suggesting Mr. Cassano informed
the auditor and senior AIG executives about the adjustment…[and] told
AIG shareholders in November 2007 that AIG would have “more mark downs,”
meaning it would lower the value of its swaps.” So who’s telling the
truth?

“What did they know, and when did they know
it?” Those are questions investigators invariably ask when trying to
determine who’s responsible for an offense or a misdeed….a third,
equally important question must be asked: “What did they do once they
knew what they knew?”

All of these investigations are inevitably
producing reams of information – lots of it in electronic form via emails
and electronic records of conversations, meeting minutes, contracts and
calculations. But this information is being made available to journalists
and the general public on an intermittent and inconsistent basis. As the
information dribbles out in linkable, source-able, quotable form, the
journalists write more stories.

The PwC documents proving Mr. Cassano’s contentions
of good faith were probably available to the Department of Justice early
this year. The substance of them was made available to some journalists in
Aprilwhen they started reporting Cassano would
not face charges and then later in May when
stories were written about charges being dropped. The actual documents show
clearly that PwC knew everything in advance of the December 2007 AIG
investor meeting. They were
recently posted to the FCIC and
House Oversight Committeesites.

The stories have been out there for a while. The
details are now well known. AIG was under pressure from all sides since late
2006 and PwC stood side by side with them throughout:

PwC continued to enable AIG’s “uncontrolled” ways even after the
restatements and serious charges leveled for
accounting manipulations and fraud of the 1999-2005 period. This
potential professional negligence opened the door for Cassano and the
Financial Products Group to construct the AIG super senior credit
default swaps portfolio house of cards.

Every time a scandal such as this occurs,
earnest journalistsbelieve the auditors will come
under closer scrutiny.

They don’t.

“American
International Group Inc.’s
admission this week that it engaged in improper accounting practices
is putting the nation’s largest independent auditing firm in the
spotlight: PricewaterhouseCoopers LLP…For now, the Securities and
Exchange Commission, which in February subpoenaed documents from the
firm about AIG, isn’t focusing on the accountants’ actions, people
familiar with the matter said. Instead, SEC investigators, working with
New York state officials, are trying to determine what AIG told its
auditors about deals under scrutiny and whether that information was
truthful, the people said. But at some point, investigators will press
PricewaterhouseCoopers to explain the reasons it missed the improper
accounting, the people added.”

Instead, in this case,PwC
was reappointed to their jobs with the help of
enabler Arthur Levitt.

PwC, as auditor also of Goldman Sachs, JP Morgan,
Bank of America, Barclays, Freddie Mac, PIMCO funds, and
two of the Big 3 ratings agencies– Moody’s (until
mid-2008) and Fitch – had a pretty good eye into both
AIG’sand
Goldman Sachs’counterparty risk and the ratings
roller coaster ride they all were on.

From
Cassano’s FCIC testimony in June 2010: “In
light of the auditors’ heavy involvement in the fair-market-model
evolution generally, and their prior knowledge of the existence
and magnitude of the negative-basis adjustment in particular, I
also found the material-weakness finding surprising, to say the least. I
know AIG senior management argued strenuously against it.”

I asked
Tucker Warren, spokesperson for the FCIC, when or
if any of the audit firms – EY for Lehman, Deloitte for Bear Stearns, WaMu,
American Home and Merrill Lynch, KPMG for Citigroup, Fannie Mae,
Countrywide, Wachovia, and New Century or PwC for AIG, Freddie Mac, Goldman
Sachs or Bank of America – would testify before the Commission on the causes
of the financial crisis.

The prominent accountant who stole at least $13
million from more than 50 clients apologized to them moments before
receiving one of the harshest sentences for white collar crime in recent
memory in Sacramento federal court.

William R. Murray, 56, was ordered by U.S. District
Court Senior Judge Edward Garcia to serve 19 1/2 years in federal prison
followed by three years of supervised release.

Murray pleaded guilty in March to two mail fraud
and tax charges for a long-running Ponzi scheme in which he converted
clients' tax payments to his personal use and stole money they trusted him
to invest.

News10 first reported the massive fraud last
November before criminal charges were filed. Murray, a former IRS agent,
frequently appeared on News10 to discuss tax and investment strategies.

Prior to Friday's sentencing, nine of Murray's
victims described their losses to Garcia and implored him to impose the
maximum sentence. One of the victims, Joyce Clifford, broke down in tears as
she spoke of losing her home and life savings to Murray.

"It's difficult to realize there can be such rotten
people in this world," said Clifford, 78. "He betrayed an innocent elderly
person who trusted him."

One of the two criminal charges involved in the
plea bargain was filed specifically for Clifford, and Murray's sentence was
enhanced because of her age.

Murray stood alongside attorney Donald Heller
during the entire proceeding, which lasted more than an hour. Murray wore an
orange jumpsuit issued by the Butte County Jail where he had been housed
under contract by the U.S. Marshal. Although he wore a shackle around his
waist, his hands were not cuffed.

Other victims described how Murray had the ability
to keep their trust even as the IRS was asking about missing tax payments.

"He was like my brother. We broke bread together,"
said William Ames, an El Dorado Hills electrician and inventor who lost as
much as $1 million to Murray.

When asked by Garcia if he had anything to say
before being sentenced, Murray offered the following apology but was quickly
challenged by the judge.

"I deeply regret it, and it's something I will live
with the rest of my life. I'm sorry for my actions," Murray told Garcia,
with his back to his victims.

A former finance director at the London
Philharmonic Orchestra (LPO) is facing jail for stealing £645,000 from the
company.

Australian accountant Cameron Poole forged
signatures on company cheques and credit cards to embezzle cash which he
then spent on holidays, designer clothes, art and jewellery, according to
the Daily Mail .

The fraud took place between January 2007 and
November 2009. Poole hid the payments he was making to himself by making
false entries on the orchestra's computerised accounting system.

Poole claimed that money had been paid to IMG
Artists, which manages singers and musicians, when in fact he used the cash
to pay a building contractor. He was also in charge of running annual
audits, and manipulated the figures to show the orchestra’s expenditure as
far less than its revenue. The false information had an impact on LPO’s
funding and grant applications.

Cameron is currently paying off a £2.3m High Court
order arising from a civil action brought by the orchestra in February.

In a hearing at Southwark crown court, Poole
admitted fraud by abuse of position and acquiring and using criminal
property. He is due to be sentenced on 28 September, but the judge in the
case warned the 'most likely outcome' would be a custodial sentence.

Poole, an active member of his south London church,
worked for consulting firm Accenture and a child poverty charity in Africa
before moving to the orchestra.

A former hedge-fund manager has pleaded guilty to
criminal charges in an
investment scam in which he bilked as much as
$900-million from investors, including four university endowments.

In his plea, Paul R. Greenwood said on Wednesday
that he and his partner, Steven Walsh, had spent money from the investment
accounts on themselves and their family members. According to investigators,
the two spent at least $160-million on mansions, horses, rare books, and an
$80,000 collectible teddy bear. Mr. Walsh has pleaded not guilty, and Mr.
Greenwood will testify against him at trial.

The two promised low risks and high returns to
investors in what was essentially a Ponzi scheme. Their 16 institutional
investors included the University of Pittsburgh ($65-million invested),
Carnegie Mellon University ($49-million),
Bowling Green State University($15-million), and
Ohio Northern University ($10-million).

The universities realized something was wrong last
year, when they discovered that much of their assets had been signed out as
promissory notes attributed to Mr. Walsh and Mr. Greenwood. Carnegie
Mellon's treasurer traveled to the firm's offices in New Jersey and
Connecticut in an unsuccessful quest to find out what had happened to the
university's investment.

After the two money managers were arrested, an
investment adviser who works with university endowments said that background
checks should have spotted problems with the fund, and that he had advised
colleges to pull out of it.

A court-appointed receiver is pursuing the pair's
assets in an attempt to recoup some of the losses for investors. Mr.
Greenwood's assets will be auctioned off, including, presumably, his
collection of rare stuffed animals. He faces a prison sentence of as long as
85 years and hundreds of millions of dollars in fines at his December
sentencing, according to news reports.

Jensen Comment
Some of you might recall my earlier tidbits on how this case also involved Deloitte.

Question
Why would four universities (Carnegie-Mellon, Pittsburgh, Bowling
Green, and Ohio Northern) invest hundreds of millions dollars in a
fraudulent investment fund and what makes this fraud different from
the Madoff and Stanford fund scandals?

One of the reasons is that the fraudulent Westridge Capital
Management Fund was audited by the reputable Big Four firm of
Deloitte.
It seems to be Auditing 101 to verify that securities investments
actually exist and have not be siphoned off illegally. Purportedly,
Paul R. Greenwood and Stephen Walsh siphoned off hundreds of
millions to fund their lavish personal lifestyles

Koch recently told state lawmakers that Iowa officials believed they
had "covered the bases" but that "obviously, something went wrong."
He and Cochrane, in an interview, said that there was no apparent
problem with Westridge that would raise concerns. Numerous
government regulatory agencies had audited the company and the
venerable
Deloitte and Touchefirm was Westridge's auditor. The
company's investment returns did not raise suspicion because they
generally followed market trends: The firm gained and lost money
when the rest of the market did.
Stephen C. Fehr, "Iowa, N.D. victims of investment fraud,"
McClatchy-Tribune News Service, March 16, 2009 ---
http://www.individual.com/story.php?story=97917687

As with the investors who lost $65 billion in the Madoff Fund, word
of mouth from respected people and institutions seem to weigh more
than factual analysis for countless investors? Rabbi Ragan says a
good man runs this fund? If Carnegie-Mellon's investing in it it
most be safe? Yeah Right!
Various other investors and investment funds allegedly lost millions
in the Greenwood-Walsh Fund Fraud ---
http://www.nytimes.com/2009/02/26/business/26scam.html?scp=1&sq=paul
greenwood&st=cse
The Pennsylvania Employees’ Retirement System was saved in the nick
of time from investing nearly a billion dollars in the fund upon
discovering that the National Futures Association began an
investigation of the Greenwood-Walsh Fund. For other duped investors
it was too late.

But in some cases the auditing firm is reputable and has deep
pockets.

Ohio Northern University is the fourth higher-education institution
to announce that it is seeking to recoup money in an alleged
$554-million investment fraud, university officials
said today. Ohio
Northern’s endowment had $10-million invested with two Wall Street
veterans who face criminal charges for allegedly using investors’
money as a “personal piggy bank,” spending at least $160-million on
mansions, horses, rare books, and collectible toys.

Also tied up in theapparent swindle
is $65-million from the University of Pittsburgh, $49-million from
Carnegie Mellon University, and$15-millionfrom Bowling Green State University.
Securities lawyers say little value from the original investments
will be recovered. Officials from all of the universities say the
potential losses will have no immediate impact on their operations.

Most college endowments rely on outside investment consultants to
help direct their money. Hartland & Company, a financial firm in
Cleveland, steered the now-missing investments by Ohio Northern and
Bowling Green to the firm running the allegedly-fraudulent scheme.
Pitt and Carnegie Mellon relied on the advice of Wilshire
Associates, a major California-based consulting firm.

Paul R. Greenwood and Stephen Walsh, the two Wall Street traders who
owned the suspect firm, face charges of securities fraud, wire
fraud, and conspiracy. Federal regulators have also sued the men,
and are pursuing their assets.

Two East Coast investment managers sued for fraud by the University
of Pittsburgh and Carnegie Mellon University misappropriated more
than $500 million of investors' money to hide losses and fund a
lavish lifestyle that included purchases of $80,000 collectible
teddy bears, horses and rare books, federal authorities said
yesterday.

As Pitt and Carnegie Mellon were busy trying to learn whether they
will be able to recover any of their combined $114 million in
investments through Westridge Capital Management, the FBI yesterday
arrested the corporations' managers.

Paul Greenwood, 61, of North Salem, N.Y., and Stephen Walsh, 64, of
Sands Point, N.Y., were charged in Manhattan -- by the same office
prosecuting the Bernard L. Madoff fraud case -- with securities
fraud, wire fraud and conspiracy.

Both men also were sued in civil court by the U.S. Securities and
Exchange Commission and the Commodity Futures Trading Commission,
which alleged that the partners misappropriated more than $553
million and "fraudulently solicited" $1.3 billion from investors
since 1996.

The Accused

Paul Greenwood and Stephen Walsh are accused of misappropriating
millions from investors. Here is a look at some of their biggest
personal purchases:

• HOME: Mr. Greenwood, a horse breeder, owned a horse farm in North
Salem, N.Y., an affluent community that counts David Letterman as a
resident.

• BEARS: Mr. Greenwood owns as many as 1,350 Steiff toys, including
teddy bears costing as much as $80,000.

• DIVORCE: Mr. Walsh bought his ex-wife a $3 million condominium as
part of their divorce settlement.

"This is huge," said David Rosenfeld, associate regional director of
the SEC's New York Regional Office. "This is a truly egregious fraud
of immense proportions."

Lawyers for the defendants either could not be reached or had no
comment.

Mr. Greenwood and Mr. Walsh, longtime associates and former
co-owners of the New York Islanders hockey team, ran Westridge
Capital Management and a number of affiliated funds and entities.

As late as this month, the partners appeared to be doing well. Mr.
Greenwood told Pitt's assistant treasurer Jan. 21 that they had $2.8
billion under management -- though that number is now in question.
And on Feb. 2, Pitt sent $5 million to be invested.

But in the course of less than three weeks, Westridge's mammoth
portfolio imploded in what federal authorities called an investment
scam meant to cover up trading losses and fund extravagant purchases
by the partners.

An audit launched Feb. 5 by the National Futures Association proved
key to uncovering the alleged deceit and apparently became the
linchpin of the case federal prosecutors are building.

That audit came about in an indirect way. The association, a
self-policing membership body, had taken action against a New York
financier. That led to a man named Jack Reynolds, a manager of the
Westridge Capital Management Fund in which CMU invested $49 million;
and Mr. Reynolds led to Westridge.

"We just said we better take a look at Jack Reynolds and see what's
happening, and that led us to Westridge and WCM, so it was a domino
effect," said Larry Dyekman, an association spokesman. "We're just
not sure we have the full picture yet."

Mr. Reynolds has not been charged by federal authorities, but he is
named as a defendant in the lawsuit that was filed last week by Pitt
and CMU.

"Greenwood and Walsh refused to answer any of our questions about
where the money was or how much there was," Mr. Dyekman continued.

"This is still an ongoing investigation, and we can't really say at
this point with any finality how much has been lost."

The federal criminal complaint traces the alleged illegal activity
to at least 1996.

FBI Special Agent James C. Barnacle Jr. said Mr. Greenwood and Mr.
Walsh used "manipulative and deceptive devices," lied and withheld
information as part of a scheme to defraud investors and enrich
themselves.

The complaint refers to a public state-sponsored university called
"Investor 1" whose details match those given by Pitt in its lawsuit.

The SEC's Mr. Rosenfeld said the fraud hinged not so much on the
partners' investment strategy but on the fact that they are believed
to have simply spent other people's money on themselves.

"They took it. They promised the investors it would be invested. And
instead of doing that they misappropriated it for their own use,"
Mr. Rosenfeld said.

Not only do federal authorities believe Mr. Greenwood and Mr. Walsh
used new investors' funds to cover up prior losses in a classic
Ponzi scheme, they used more than $160 million for personal expenses
including:

• Rare books bought at auction;

• Steiff teddy bears purchased for up to $80,000 at auction houses
including Sotheby's;

• Money for Ms. Walsh and Mr. Greenwood's wife, Robin Greenwood, 57,
both of whom are defendants in the SEC suit. More than $2 million
was allegedly wired to their personal accounts by an unnamed
employee of the partners.

"Defendants treated investor money -- some of which came from a
public pension fund -- as their own piggy bank to lavish themselves
with expensive gifts," said Stephen J. Obie, the Commodity Futures
Trading Commission's acting director of enforcement.

It is not clear how Pitt and CMU got involved with Mr. Greenwood and
Mr. Walsh. But there is at least one connection involving academia.
The commission suit said Mr. Walsh represented to potential
investors that he was a member of the University at Buffalo
Foundation board and served on its investment committee.

Mr. Walsh is a 1966 graduate of the State University of New York at
Buffalo where he majored in political science.

He was a trustee of the University at Buffalo Foundation, but the
foundation did not have any investments in Westridge or related
firms.

Universities, charitable organizations, retirement and pension funds
are among the investors who have done business with Mr. Greenwood
and Mr. Walsh.

Among those investors are the Sacramento County Employees'
Retirement System, the Iowa Public Employees' Retirement System and
the North Dakota Retirement and Investment Office, which handles $4
billion in investments for teachers and public employees.

The North Dakota fund received about $20 million back from Westridge
Capital Management, but has an undetermined amount still out in the
market, said Steve Cochrane, executive director.

Mr. Cochrane said Westridge Capital was cooperative in returning
what money it could by closing out their position and sending them
the money.

"I dealt with them exclusively all these years," Mr. Cochrane said.

"They always seemed to be upfront and honest. I think they're as
stunned and as victimized as we are, is my guess."

He said Westridge Capital had done an excellent job over the years.

The November financial statement indicated that the one-year return
from Westridge Capital was a negative 11.87 percent, but the
five-year annualized rate of return was a positive 8.36 percent.

******Begin Quotation
“It said all clients received audited financial results from
Deloitte & Touche, and custodial statements from trustee banks
showing Westridge’s trading. Carnegie Mellon hires consultants to
provide expertise and perform substantial due diligence, said Ken
Walters a spokesman for the school. “In this case, this investment
was “highly recommended” to the university by Wilshire, he said. He
declined to comment further on the consultant.”
******End Quotation

Noted University of Toronto Accounting professor,
Dr Gordon Richardson, has filed an expert witness report in a pending class
action suit against the Canadian Imperial Bank of commerce, saying that the
bank substantially overstated its profits in 2007 and 2008 by basing its
estimates of risk on indefensible assumptions. The lawsuit is expected to go
to court in March, 2011. A write-up on the submission is at
http://business.financialpost.com/2010/08/10/subprime-suit-challenges-cibc-accounting/Dr Richardson recommended that the bank restate its
income.

Canadian Imperial Bank of Commerce breached
Canadian accounting standards by failing to properly disclose its exposure
to subprime mortgages, according to expert testimony filed in Canada’s
biggest lawsuit to stem from the credit crisis.

Gordon Richardson, the KPMG professor of accounting
at the Rotman School of Management in Toronto and a PhD, writes in his
65-page review of the bank’s subprime disclosure that “CIBC failed to comply
with GAAP disclosure requirements … and the information provided to
pertaining credit risk was, prior to December 6, 2007, wholly misleading to
the market in general and to class members who invested in CIBC.”

The lawsuit covers the period of May 31, 2007 to
Feb. 28, 2008, a tumultuous period in the capital markets when credit
started freezing up and investment firms scrambled to understand their
exposure to subprime investments.

Mr. Richardson said, “CIBC substantially overstated
its income for the last three quarters of fiscal 2007 and the first quarter
of 2008 and income for these periods should be restated in order to comply
with GAAP.” The overstatement resulted from “indefensible assumptions”
related to its hedge fund exposure.

A second expert witness report from a noted
securities valuation firm in the United States pegs CIBC investor losses at
a maximum of $6.6-billion. The filings are made in preparation for the
mammoth class-action suit, which is expected to come before the Ontario
Superior Court for certification in March 2011.

CIBC spokesman Rob McLeod said, “CIBC denies these
allegations and plans to vigorously defend this action. CIBC is confident
that, at all times, its conduct was appropriate and that its disclosure met
applicable requirements.” The bank is expected to file its response by the
end of August.

Joel Rochon, who is representing Thornhill, Ont.,
investor Howard Green in the lawsuit, which was filed on July 22, 2008,
declined to comment on the expert testimony reports.

The lawsuit claims CIBC misrepresented the bank’s
exposure to subprime investments and failed to implement appropriate
risk-management controls related to billions of dollars in investments in
collateralized debt obligations and U.S. subprime mortgages.

A similar investor lawsuit in the United States
covering CIBC disclosures between May 2007 to May 2008 was dismissed in
March. Judge William Pauley of the Manhattan Federal Court wrote, “CIBC,
like so many other institutions, could not have been expected to anticipate
the crisis with the accuracy [the] plaintiff enjoys in hindsight.”

However, the laws between the two countries differ
and CIBC is being sued in Canada under a new section of the Ontario
Securities Act, which makes it easier for investors to sue corporations for
misrepresentations. An investor class action against Imax Corp. over
disclosure about the status of theatre construction was certified by an
Ontario judge in February.

“In a nutshell, investors needed to be told by no
later than April 30, 2007 that CIBC’s maximum exposure to credit risk was
$11.4-billion. Instead CIBC misled its shareholders by remaining silent and
by misstating and minimizing its exposure.” He writes that it wasn’t until
Dec. 6, 2007 that the bank “stunned the investment community” and revealed
the $11.4-billion exposure.

He said based on the TABX and ABX indices, which
tracked the value of credit default swaps tied to subprime mortgage bonds,
the bank should have realized that its main $3.5-billion hedge with
counterparty ACA Financial was in trouble. “CIBC had to have known that its
hedge of $3.5-billion with ACA had collapsed by April 30, 2007 and by no
later than July 2007.”

He said that should have resulted in fair value
writedowns of $769-million, $2.38-billion and $3.82-billion for the second
and third quarters of fiscal 2007 versus the $273-million and $747-million
hit the bank declared.

He examined two other hedges involving XL Capital
and FGIC Corp. and concluded that “CIBC should have recorded cumulative U.S.
subprime fair value write downs between $6.54-billion and $6.95-billion by
the end of the first [fiscal] quarter of 2008, rather than the $4.14-billion
cumulative U.S. subprime write own it did take…. ”

While the CIBC suit is one of the few pieces of
subprime litigation in Canada, in the United States there have been more
than 400 lawsuits filed in federal courts related to the credit crisis,
according to NERA Economic consulting, which tracks such suits.

Elaine Buckberg, a senior vice-president at NERA in
New York, said her firm has identified 74 cases relating to collateral debt
obligations, 10 of which were filed in 2010 and the others filed between
2007 and 2009. Overall, U.S. credit crisis lawsuits have resulted in
US$2.1-billion in settlements involving a number of parties. Mortgage lender
Countrywide Financial Corp. agreed to pay US$600-million to shareholders who
accused it of misleading investors about its lending practices. Mortgage
loan originator New Century Financial settled with investors for
$125-million. Merrill Lynch settled its subprime litigation for
$475-million. Charles Schwab paid out $225-million over allegations of
misrepresentation related to one of its mutual funds.

It isn’t the first investor class action CIBC has
been at the centre of. In 2005, it settled a claim by Enron Corp.
shareholders for US$2.4-billion.

Ernst & Young LLP, Chartered Accountants, Toronto,
Ontario, is the external auditor who prepared the Independent Auditors’ Reports
to Shareholders - Report on Financial Statements and Report on Internal Control
over Financial Reporting. Ernst & Young LLP is independent with respect to CIBC
within the meaning of the Rules of Professional Conduct of the Institute of
Chartered Accountants of Ontario, United States federal securities laws - 13 -
and the rules and regulations thereunder, including the independence rules
adopted by the United States Securities and Exchange Commission pursuant to the
Sarbanes-Oxley Act of 2002; and applicable independence requirements of the
Public Company Accounting Oversight Board (United States).
Annual Information Form, Canadian Imperial Bank of Commerce, December 4, 2008
---
http://www.cibc.com/ca/pdf/investor/2008-annual-info-form-en.pdf

Attorneys from Houston’s Ahmad, Zavitsanos &
Anaipakos are representing a group of investors in a lawsuit filed against
hedge fund auditors Ernst & Young after the group lost more than $17 million
following the collapse of a Plano, Texas-based hedge fund that promised
low-risk investments.

The lawsuit focuses on two funds sold by Plano’s
Parkcentral Global and was filed on behalf of Houston financial consultant
Gus H. Comiskey and four Tucson, Ariz.-based entities, including the Thomas
R. Brown Family Private Foundation. The now-defunct Parkcentral Global was
operated by affiliates of billionaire and former presidential candidate H.
Ross Perot before closing its doors after losing a total of more than $2.6
billion.

“Our clients were told that an investment in
Parkcentral was designed to preserve capital. Instead, they lost every penny
in record time. E&Y was supposed to be auditing Parkcentral, but the audited
financial statements never once warned Parkcentral’s investors of their
impending doom,” says attorney Demetrios Anaipakos, who will try the case
with Amir H. Alavi.

The $31 million embezzlement at Koss Corp. included
several spurts of rapid-fire spending, according to a recent court filing -
including one three-day span in 2006 during which nearly $500,000 flew out
of the Milwaukee company's accounts and into the hands of three high-end
retailers and a credit card company.

The lists of checks and wire transfers shed new
light on the scheme for which Sujata "Sue" Sachdeva, former vice president
of finance for Koss, is facing six federal felony charges. She was arrested
by the FBI in December and has pleaded not guilty.

The list, which takes up the equivalent of about 10
single-spaced pages, is contained in a lawsuit that Koss filed last month
against Sachdeva and its former auditor, Grant Thornton LLP.

The list shows that in addition to expenditures at
upscale clothing retailers, Koss funds also were spent on smaller luxury
items such as a personal trainer and limousine rides. Koss charges that the
payments listed in the lawsuit were used to pay for Sachdeva's personal
expenses.

The spending spurts left some experts wondering how
the scheme could have gone unchecked for at least seven years.

"If they just looked at a sample of the
withdrawals, they would have found it," said Joel Joyce, a forensic
accountant at Reilly, Penner & Benton, referring to Koss executives or
outside auditors. "They might not have caught it in the first month . . .
but my guess is it would not have been six to seven years."

A case in point was a flurry of check-writing in
the summer of 2006.

On Aug. 1 of that year, two cashier's checks
totaling $154,021 went to Valentina Inc., an exclusive Mequon clothing
store.

The next day, an $18,100 cashier's check was cut to
Neiman Marcus and a $10,120 check was made out to Saks Fifth Avenue.

Then, on Aug. 3, three checks totaling $296,494
were written to American Express, the credit card company that eventually
blew the whistle on Sachdeva last year.

Total over the three-day span: $478,735.

The checks to retailers identified the merchants by
their initials, Koss said in the lawsuit. For example Valentina was V Inc.
and Saks Fifth Avenue was S.F.A Inc.

Tony Chirchirillo, owner of Valentina, said he saw
nothing suspicious about the large cashier's checks his company received
from Sachdeva. He said he assumed the checks were backed by her own funds.

It's believed that over a five-year period Sachdeva
spent more than $5 million at the boutique, sources said, although
Chirchirillo said that figure "seemed high."

"I didn't know it came from Koss," Chirchirillo
said, explaining that unlike personal checks, the cashier's checks did not
list whose account the money was being drawn from. "I was told by an FBI
agent that the money came from Koss. I would not have taken it if it said
Koss."

The largest withdrawals listed in the lawsuit went
to upscale retailers and to American Express, the target of an earlier
lawsuit filed by Koss that contended the credit card company should have
raised suspicions about the expenditures sooner.

The August spurt wasn't the only one. On Feb. 3,
2006, two cashier's checks were written to American Express, one for
$102,836 and the other for $101,451.

And from July 11 to July 17 of 2003, a check for
$20,182 was written to Marshall Fields, a second for $26,420 went to Saks
Fifth Avenue, and five checks totaling $104,738 went to American Express.

The indictment against Sachdeva charges that she
spent most of the embezzled money on luxury clothing and jewelry, furs,
vacations and items for her Mequon home. More than 22,000 items - some with
price tags still attached - have been seized by federal authorities in
connection with the investigation, including fur coats, designer clothing,
jewelry, art items and hundreds of pairs of shoes.

Among the payments detailed in the latest lawsuit:

• Carey Limousine received $16,706 from 2006 to
2008, with the bulk of the money coming in 2007. The most expensive ride was
for $4,460 in September 2007.

• Chris A. Aiello, a personal trainer, was paid
$770 in 2005. Aiello said he trained Sachdeva two to three times a week,
sometimes in a conference room at Koss headquarters and sometimes at her
Mequon home. Normally, Aiello said, he was paid with personal checks by
Sachdeva, although he recalled that on a handful of occasions Sachdeva told
him to get his money from one of her assistants, Julie Mulvaney. He said he
thinks those few checks came from Koss.

"You question it in your mind, but you don't say
anything," said Aiello, who no longer trains Sachdeva. "We weren't doing
anything illegal."

• Several payments, including one for $21,000 and
another for $14,000, went to individuals. Ongoing investigations include an
effort to determine what connection, if any, those people had to Sachdeva.

• Mulvaney was paid a total of $14,000, and another
Sachdeva assistant, Tracy Malone, was paid about $1,800. Both employees were
fired by Koss last year, and attorneys for both women have said they did
nothing wrong.

In addition, more than $145,000 was taken from
petty cash, in increments ranging from $482 to $9,049, according to the Koss
list.

"That's a lot of distributions coming out of petty
cash," said Richard Brown, the retired head of accounting company KPMG's
Milwaukee office. "But petty cash doesn't get a lot of attention."

At the time of the scheme, Michael Koss held five
high-level titles in the company including chief executive officer and chief
financial officer. Koss, the son of the company's founder, remains CEO but
is no longer CFO.

"A CFO should have been reviewing financial reports
that might have raised questions, which might have included 'Let me see the
documents,' " said Brown, who now teaches accounting. That review would have
likely led to question about why thousands, and in some cases millions, were
being paid to retailers, he said.

The suit, filed in Cook County, Ill., seeks damages
from Grant Thornton and alleges the national accounting firm failed to spot
the fraud and repeatedly assured Koss that it had adequate internal
controls.

Grant Thornton said in a statement that it had met
"all of our professional obligations and that our work complied with
professional standards."

Michael Koss and the California attorney who filed
the lawsuit did not return calls for comment.

Brown said suits filed against auditors by
companies that are fraud victims often are settled out of court.

"A full blown civil lawsuit will bring out a lot of
facts potentially embarrassing to both the company and the accounting firm,"
Brown said, adding it was impossible to say which side might prevail in
litigation. "Both the company and the audit firm will suffer continued
embarrassing publicity if the suit goes to completion. It is for this reason
that these types of suits often get settled out of court before a trial

The $31 million embezzlement at Koss Corp. included
several spurts of rapid-fire spending, according to a recent court filing -
including one three-day span in 2006 during which nearly $500,000 flew out
of the Milwaukee company's accounts and into the hands of three high-end
retailers and a credit card company.

The lists of checks and wire transfers shed new
light on the scheme for which Sujata "Sue" Sachdeva, former vice president
of finance for Koss, is facing six federal felony charges. She was arrested
by the FBI in December and has pleaded not guilty.

The list, which takes up the equivalent of about 10
single-spaced pages, is contained in a lawsuit that Koss filed last month
against Sachdeva and its former auditor, Grant Thornton LLP.

The list shows that in addition to expenditures at
upscale clothing retailers, Koss funds also were spent on smaller luxury
items such as a personal trainer and limousine rides. Koss charges that the
payments listed in the lawsuit were used to pay for Sachdeva's personal
expenses.

The spending spurts left some experts wondering how
the scheme could have gone unchecked for at least seven years.

"If they just looked at a sample of the
withdrawals, they would have found it," said Joel Joyce, a forensic
accountant at Reilly, Penner & Benton, referring to Koss executives or
outside auditors. "They might not have caught it in the first month . . .
but my guess is it would not have been six to seven years."

A case in point was a flurry of check-writing in
the summer of 2006.

On Aug. 1 of that year, two cashier's checks
totaling $154,021 went to Valentina Inc., an exclusive Mequon clothing
store.

The next day, an $18,100 cashier's check was cut to
Neiman Marcus and a $10,120 check was made out to Saks Fifth Avenue.

Then, on Aug. 3, three checks totaling $296,494
were written to American Express, the credit card company that eventually
blew the whistle on Sachdeva last year.

Total over the three-day span: $478,735.

The checks to retailers identified the merchants by
their initials, Koss said in the lawsuit. For example Valentina was V Inc.
and Saks Fifth Avenue was S.F.A Inc.

Tony Chirchirillo, owner of Valentina, said he saw
nothing suspicious about the large cashier's checks his company received
from Sachdeva. He said he assumed the checks were backed by her own funds.

It's believed that over a five-year period Sachdeva
spent more than $5 million at the boutique, sources said, although
Chirchirillo said that figure "seemed high."

"I didn't know it came from Koss," Chirchirillo
said, explaining that unlike personal checks, the cashier's checks did not
list whose account the money was being drawn from. "I was told by an FBI
agent that the money came from Koss. I would not have taken it if it said
Koss."

The largest withdrawals listed in the lawsuit went
to upscale retailers and to American Express, the target of an earlier
lawsuit filed by Koss that contended the credit card company should have
raised suspicions about the expenditures sooner.

The August spurt wasn't the only one. On Feb. 3,
2006, two cashier's checks were written to American Express, one for
$102,836 and the other for $101,451.

And from July 11 to July 17 of 2003, a check for
$20,182 was written to Marshall Fields, a second for $26,420 went to Saks
Fifth Avenue, and five checks totaling $104,738 went to American Express.

The indictment against Sachdeva charges that she
spent most of the embezzled money on luxury clothing and jewelry, furs,
vacations and items for her Mequon home. More than 22,000 items - some with
price tags still attached - have been seized by federal authorities in
connection with the investigation, including fur coats, designer clothing,
jewelry, art items and hundreds of pairs of shoes.

Among the payments detailed in the latest lawsuit:

• Carey Limousine received $16,706 from 2006 to
2008, with the bulk of the money coming in 2007. The most expensive ride was
for $4,460 in September 2007.

• Chris A. Aiello, a personal trainer, was paid
$770 in 2005. Aiello said he trained Sachdeva two to three times a week,
sometimes in a conference room at Koss headquarters and sometimes at her
Mequon home. Normally, Aiello said, he was paid with personal checks by
Sachdeva, although he recalled that on a handful of occasions Sachdeva told
him to get his money from one of her assistants, Julie Mulvaney. He said he
thinks those few checks came from Koss.

"You question it in your mind, but you don't say
anything," said Aiello, who no longer trains Sachdeva. "We weren't doing
anything illegal."

• Several payments, including one for $21,000 and
another for $14,000, went to individuals. Ongoing investigations include an
effort to determine what connection, if any, those people had to Sachdeva.

• Mulvaney was paid a total of $14,000, and another
Sachdeva assistant, Tracy Malone, was paid about $1,800. Both employees were
fired by Koss last year, and attorneys for both women have said they did
nothing wrong.

In addition, more than $145,000 was taken from
petty cash, in increments ranging from $482 to $9,049, according to the Koss
list.

"That's a lot of distributions coming out of petty
cash," said Richard Brown, the retired head of accounting company KPMG's
Milwaukee office. "But petty cash doesn't get a lot of attention."

At the time of the scheme, Michael Koss held five
high-level titles in the company including chief executive officer and chief
financial officer. Koss, the son of the company's founder, remains CEO but
is no longer CFO.

"A CFO should have been reviewing financial reports
that might have raised questions, which might have included 'Let me see the
documents,' " said Brown, who now teaches accounting. That review would have
likely led to question about why thousands, and in some cases millions, were
being paid to retailers, he said.

The suit, filed in Cook County, Ill., seeks damages
from Grant Thornton and alleges the national accounting firm failed to spot
the fraud and repeatedly assured Koss that it had adequate internal
controls.

Grant Thornton said in a statement that it had met
"all of our professional obligations and that our work complied with
professional standards."

Michael Koss and the California attorney who filed
the lawsuit did not return calls for comment.

Brown said suits filed against auditors by
companies that are fraud victims often are settled out of court.

"A full blown civil lawsuit will bring out a lot of
facts potentially embarrassing to both the company and the accounting firm,"
Brown said, adding it was impossible to say which side might prevail in
litigation. "Both the company and the audit firm will suffer continued
embarrassing publicity if the suit goes to completion. It is for this reason
that these types of suits often get settled out of court before a trial
takes place."

The PCAOB has issued its annual report on Ernst &
Young having given the firm the third degree at its national office and 30
of its 80 U.S. offices. It inspected 58 audits performed by the firm but
exactly who is, of course, a big secret (unlessyou tell us).

There were five “Issuers” that were listed in the
report and some form of the word “fail” was used 25 times (that includes the
footnotes).

[Issuer A] The Firm failed to adequately test
the issuer’s loan loss reserves related to certain loans held for
investment. Specifically, the Firm failed to reconcile certain values
used in the issuer’s models with industry data, failed to test the
recovery rates used in the issuer’s calculation, and failed to test the
qualitative components of the reserves.

Damn those loan loss reserves!

[Issuer C] The Firm failed to perform
sufficient procedures to test the issuer’s allowance for loan losses
(“ALL”). The issuer determined the general portion of its ALL estimate,
which represented a significant portion of the ALL, using certain
factors such as loan grades. Data for this calculation were obtained
from information technology systems that reside at a third-party service
organization. The Firm relied on these systems, but it failed to test
the information-technology general controls (“ITGCs”) over certain of
these systems, and it failed to test certain of the application controls
over these systems. Further, the Firm’s testing of the controls over the
assignment and monitoring of loan grades was insufficient, as the Firm
failed to assess the competence of the individuals performing the
control on which it relied.

This loan thing appears to be a trend…

[Issuer D] The Firm failed to sufficiently test
the costing of work-in-process and finished goods inventory.
Specifically, the Firm’s tests of controls over the costing of such
inventory were limited to verifying that management reviewed and
approved the cost allocation factors, without evaluating the review
process that provided the basis for management’s approval.

Hopefully that doesn’t blow back on an A1.

Anyway, you get the picture. The whole report is
below for your reading pleasure. E&Y’s got its $0.02 in, however it was
short and was mostly concerned about the firm’s right to keep its response
to Part II (the non-public part)…non-public:

We are enclosing our response letter to the
Public Company Accounting Oversight Board regarding Part I of the draft
Report on 2009 Inspection of Ernst & Young LLP (the “Report”). We also
are enclosing our initial response to Part II of the draft Report.

We note that Section 104(g)(2) of the
Sarbanes-Oxley Act requires that “no portions of the inspection report
that deal with criticisms of or potential defects in the quality control
systems of the firm under inspection shall be made public if those
criticisms or defects are addressed by the firm, to the satisfaction of
the Board, not later than 12 months after the date of the inspection
report.” Based on this statutory provision, we understand that our
comments on Part ii will be kept non-public as long as Part ii of the
Report itself is non-public.

In addition, we are requesting confidential
treatment of this transmittal letter.

So this doesn’t mean much other than E&Y would
prefer that no one know how it managed to tell the PCAOB to fuck right off
as nicely as it could.

When Sam Antar was cooking the books for his
company, he used a number of complicated accounting tricks to dupe auditors.
But some tactics were simple.

"These auditors from the Big Four accounting firms
are usually single kids just a few years out of school. What do kids in
their 20s think about all the time? Sex," said Antar, who was at the center
of a multi-million dollar fraud 20 years ago.

So Antar would pair "cute hot female" employees
with male auditors as part of his distraction strategy. "In effect, I was a
fraudster, matchmaker, and pimp," said Antar, who avoided jail time by
working with the U.S. government, and now advises government agencies and
businesses on avoiding accounting fraud.

Since the financial crisis struck, accounting scams
– such as the multi-billion dollar Bernard Madoff scheme – have made regular
headlines. Last week, a Hong Kong executive at Ernst & Young was detained by
police and documents were seized after evidence of falsified audit documents
came to light in a court case. Ernst settled a $1 billion negligence claim
by the liquidators of Akai Holdings out of court for an undisclosed sum and
the executive was suspended awaiting internal disciplinary action.

A London executive for accounting firm KPMG –
another of the "Big Four" accounting firms (along with Ernst,
PricewaterhouseCoopers and Deloitte Touche Tohmatsu) – was sentenced to four
years in jail in September for siphoning nearly $900,000 of company funds
for personal use.

While there are no international statistics
charting white-collar crime arrests, the number of people being trained to
detect accounting shenanigans has exploded since the financial crisis. The
U.S.-based Association of Certified Fraud Examiners, which trains
accountants in fraud investigation, has 47,000 members worldwide – adding
10,000 new members last year alone.

"There's always an uptick in fraud activity when
the economy goes down," said Kim Frisinger, a former FBI accounting fraud
investigator and managing director of LECG Hong Kong, a consulting firm.
"It's like the ocean going out and you can see everything that was hidden
under water."

The fraud triangle

If an employee is having an affair, Gary Zeune
knows exactly where he would look to find equivalent accounting chicanery.
"Look at his or her company expense reports – they will almost always have
false entries," said Zeune, an accountant who specializes in fraud. "No one
budgets to have an affair."

Although there are "millions of ways to commit
fraud, there are always three common elements in any employee fraud case –
incentive, opportunity, and rationalization," Zeune said.

Although greed is an obvious incentive, it is not
the only one – infidelity, gambling debts, drug use or simple ego can start
the slide into accounting crime.

"Look at the Société Générale incident where a
single trader, Jerome (Kerviel), lost the company $7 billion," said Zeune,
referring to the incident that nearly destroyed the French financial
services company in 2008. "Why? He wanted to show what a smart securities
trader he was. He was looking for psychic income, not monetary income."

Opportunity is created when a culprit feels there
is a relatively low likelihood of being caught – most often at private
companies, Zeune said. "They have less internal controls than publicly
listed companies."

Rationalization is the conversation with the
white-collar criminal has with him or herself to assuage their conscience –
something that is much more likely to have during a downturn, when companies
are downsizing and employees are asked to do more for less, Zeune said.

Catching a crook with crooks

But many accounting fraudsters don't operate within
the bounds of right and wrong. Large-scale frauds such as Madoff or Enron
are more pathological in nature, Antar said.

"You have to take morality out of the equation to
understand the criminal mind ... I'd still be doing it today if I didn't get
caught," said Antar, who went to school and obtained his accounting degree
solely to look for ways to subvert the law.

Like diverting auditors with attractive staff,
accounting fraud is all about distraction, Antar said. "It's like David
Copperfield, it's an illusion...I want you to look over here so you don't
see what I'm doing over there."

Another tactic: Delay. "They would come in here
with maybe six weeks to go through the books ... my goal would be to leave
them 80 percent of the work for the last week, so they're rushed to finish."

Digging into accounting fraud means understanding
"there is a big difference between truth and accuracy," said Mark Morze, who
spent five years in U.S. prisons for a billion-dollar stock fraud in the
1990s. "Every financial statement I put together was accurate, but it wasn't
truthful."

In fact, perfection is often a sign of shadiness,
said Morze, who, like Antar now teaches accountants about fraud. "You're
doing everything in reverse, so of course it's going to add up," he said.

One of the best ways to detect fraud in financial
statements is to read only the footnotes, and compare how they have changed
over time. "Look for subtle differences, and that is where they will hide
the fraud," said Antar. "That's what I did."

Most frauds fail to unravel because obvious
questions aren't asked – often because the perpetrators wrap themselves in a
veneer of integrity. "Everyone thought Enron was legit," Morze said. "Bernie
Madoff, people would say – look who his clients are, Steven Spielberg – he
must be legit."

But once questions are asked – and asked again –
the fraud often becomes apparent. "If people get offended when you ask them
a question about verification, that's a sign something is up," Morze said.
"No honest person gets offended when asking to verify something."

Kevin Voigt's article is reprinted with permission
from The Pros & The Cons, the only speakers’ bureau in the United States for
white-collar criminals.

Related articles: A day in the life of...a counter
fraud specialist Small company suffers massive embezzlements

Harvard University psychologist Marc Hauser — a
well-known scientist and author of the book “Moral Minds’’ — is taking a
year-long leave after a lengthy internal investigation found evidence of
scientific misconduct in his laboratory.

The findings have resulted in the retraction of an
influential study that he led. “MH accepts responsibility for the error,’’
says the retraction of the study on whether monkeys learn rules, which was
published in 2002 in the journal Cognition.

Two other journals say they have been notified of
concerns in papers on which Hauser is listed as one of the main authors.

It is unusual for a scientist as prominent as
Hauser — a popular professor and eloquent communicator of science whose work
has often been featured on television and in newspapers — to be named in an
investigation of scientific misconduct. His research focuses on the
evolutionary roots of the human mind.

In a letter Hauser wrote this year to some Harvard
colleagues, he described the inquiry as painful. The letter, which was shown
to the Globe, said that his lab has been under investigation for three years
by a Harvard committee, and that evidence of misconduct was found. He
alluded to unspecified mistakes and oversights that he had made, and said he
will be on leave for the upcoming academic year.

In an e-mail yesterday, Hauser, 50, referred
questions to Harvard. Harvard spokesman Jeff Neal declined to comment on
Hauser’s case, saying in an e-mail, “Reviews of faculty conduct are
considered confidential.’’

“Speaking in general,’’ he wrote, “we follow a well
defined and extensive review process. In cases where we find misconduct has
occurred, we report, as appropriate, to external agencies (e.g., government
funding agencies) and correct any affected scholarly record.’’

Much remains unclear, including why the
investigation took so long, the specifics of the misconduct, and whether
Hauser’s leave is a punishment for his actions.

The retraction, submitted by Hauser and two
co-authors, is to be published in a future issue of Cognition, according to
the editor. It says that, “An internal examination at Harvard University . .
. found that the data do not support the reported findings. We therefore are
retracting this article.’’

The paper tested cotton-top tamarin monkeys’
ability to learn generalized patterns, an ability that human infants had
been found to have, and that may be critical for learning language. The
paper found that the monkeys were able to learn patterns, suggesting that
this was not the critical cognitive building block that explains humans’
ability to learn language. In doing such experiments, researchers videotape
the animals to analyze each trial and provide a record of their raw data.

The work was funded by Harvard’s Mind, Brain, and
Behavior program, the National Science Foundation, and the National
Institutes of Health. Government spokeswomen said they could not confirm or
deny whether an investigation was underway.

The findings have resulted in the retraction of an
influential study that he led. “MH accepts responsibility for the error,’’
says the retraction of the study on whether monkeys learn rules, which was
published in 2002 in the journal Cognition.

Two other journals say they have been notified of
concerns in papers on which Hauser is listed as one of the main authors.

It is unusual for a scientist as prominent as
Hauser — a popular professor and eloquent communicator of science whose work
has often been featured on television and in newspapers — to be named in an
investigation of scientific misconduct. His research focuses on the
evolutionary roots of the human mind.

In a letter Hauser wrote this year to some Harvard
colleagues, he described the inquiry as painful. The letter, which was shown
to the Globe, said that his lab has been under investigation for three years
by a Harvard committee, and that evidence of misconduct was found. He
alluded to unspecified mistakes and oversights that he had made, and said he
will be on leave for the upcoming academic year.

In an e-mail yesterday, Hauser, 50, referred
questions to Harvard. Harvard spokesman Jeff Neal declined to comment on
Hauser’s case, saying in an e-mail, “Reviews of faculty conduct are
considered confidential.’’

“Speaking in general,’’ he wrote, “we follow a well
defined and extensive review process. In cases where we find misconduct has
occurred, we report, as appropriate, to external agencies (e.g., government
funding agencies) and correct any affected scholarly record.’’

Much remains unclear, including why the
investigation took so long, the specifics of the misconduct, and whether
Hauser’s leave is a punishment for his actions.

The retraction, submitted by Hauser and two
co-authors, is to be published in a future issue of Cognition, according to
the editor. It says that, “An internal examination at Harvard University . .
. found that the data do not support the reported findings. We therefore are
retracting this article.’’

The paper tested cotton-top tamarin monkeys’
ability to learn generalized patterns, an ability that human infants had
been found to have, and that may be critical for learning language. The
paper found that the monkeys were able to learn patterns, suggesting that
this was not the critical cognitive building block that explains humans’
ability to learn language. In doing such experiments, researchers videotape
the animals to analyze each trial and provide a record of their raw data.

The work was funded by Harvard’s Mind, Brain, and
Behavior program, the National Science Foundation, and the National
Institutes of Health. Government spokeswomen said they could not confirm or
deny whether an investigation was underway.

Gary Marcus, a psychology professor at New York
University and one of the co-authors of the paper, said he drafted the
introduction and conclusions of the paper, based on data that Hauser
collected and analyzed.

“Professor Hauser alerted me that he was concerned
about the nature of the data, and suggested that there were problems with
the videotape record of the study,’’ Marcus wrote in an e-mail. “I never
actually saw the raw data, just his summaries, so I can’t speak to the exact
nature of what went wrong.’’

The investigation also raised questions about two
other papers co-authored by Hauser. The journal Proceedings of the Royal
Society B published a correction last month to a 2007 study. The correction,
published after the British journal was notified of the Harvard
investigation, said video records and field notes of one of the co-authors
were incomplete. Hauser and a colleague redid the three main experiments and
the new findings were the same as in the original paper.

Science, a top journal, was notified of the Harvard
investigation in late June and told that questions about record-keeping had
been raised about a 2007 paper in which Hauser is the senior author,
according to Ginger Pinholster, a journal spokeswoman. She said Science has
requested Harvard’s report of its investigation and will “move with utmost
efficiency in light of the seriousness of issues of this type.’’

Colleagues of Hauser’s at Harvard and other
universities have been aware for some time that questions had been raised
about some of his research, and they say they are troubled by the
investigation and forthcoming retraction in Cognition.

“This retraction creates a quandary for those of us
in the field about whether other results are to be trusted as well,
especially since there are other papers currently being reconsidered by
other journals as well,’’ Michael Tomasello, co-director of the Max Planck
Institute for Evolutionary Anthropology in Leipzig, Germany, said in an
e-mail. “If scientists can’t trust published papers, the whole process
breaks down.’’

This isn’t the first time Hauser’s work has been
challenged.

In 1995, he was the lead author of a paper in the
Proceedings of the National Academy of Sciences that looked at whether
cotton-top tamarins are able to recognize themselves in a mirror.
Self-recognition was something that set humans and other primates, such as
chimpanzees and orangutans, apart from other animals, and no one had shown
that monkeys had this ability.

Gordon G. Gallup Jr., a professor of psychology at
State University of New York at Albany, questioned the results and requested
videotapes that Hauser had made of the experiment.

“When I played the videotapes, there was not a
thread of compelling evidence — scientific or otherwise — that any of the
tamarins had learned to correctly decipher mirrored information about
themselves,’’ Gallup said in an interview.

In 1997, he co-authored a critique of the original
paper, and Hauser and a co-author responded with a defense of the work.

In 2001, in a study in the American Journal of
Primatology, Hauser and colleagues reported that they had failed to
replicate the results of the previous study. The original paper has never
been retracted or corrected.

Harvard University announced Friday that its
investigations had found eight incidents of scientific misconduct by Marc
Hauser, a prominent psychology professor who recently started a leave,The Boston Globereported. The university
also indicated that sanctions had been imposed, and that Hauser would be
teaching again after a year. Since the Globe reported on Hauser's
leave and the inquiry into his work, many scientists have called for a
statement by the university on what happened, and Friday's announcement goes
much further than earlier statements. In a statement sent to colleagues on
Friday, Hauser said: "I am deeply sorry for the problems this case has
caused to my students, my colleagues, and my university. I acknowledge that
I made some significant mistakes and I am deeply disappointed that this has
led to a retraction and two corrections. I also feel terrible about the
concerns regarding the other five cases."

This is a classic example that shows how difficult
it is to escape accountability in science. First, when Gordon Gallup, a
colleague in our Bio-Psychology in Albany questioned the results, at first
Hauser tried to get away with a reply because Albany is not Harvard. But
then when Hauser could not replicate the experiment he had no choice but to
confess, unless he was willing to be caught some time in the future with his
pants down.

However, in a sneaky way, the confession was sent
by Hauser to a different journal. But Hauser at least had the gumption to
confess.

The lesson I learn from this episode is to do
something like what lawyers always do in research. They call it Shepardizing.
It is important not to take any journal article at its face value, even if
the thing is in a journal as well known as PNAS and by a person from a
school as well known as Harvard. The other lesson is not to ignore a work or
criticism even if it appears in a lesser known journal and is by an author
from a lesser known school (as in Albany in this case).

Jagdish -- J
agdish Gangolly (gangolly@albany.edu)
Department of Informatics College of Computing &
Information
State University of New York at Albany 7A, Harriman Campus Road, Suite 220
Albany, NY 12206

I believe a broad lesson
arises from the tale of Professor Hauser's monkey-business:

"It is unusual
for a scientist as prominent as Hauser­ - a popularprofessor and eloquent communicator of science whose
work has often been featured on television and in newspapers ­- to be named
in an investigation of scientific misconduct."

Disclaimer: this is my
personal opinion only,
and I believe these lessons apply to all professions, but since this is an
accounting listserv, lesson 1 with respect to accounting/auditing
research is:

1. even the most
prominent, popular, and eloquent communicator professors'
research, including but not limited to the field of accounting, and
including for purposes of standard-setting, rule-making, et al, should not
be above third party review and questioning (that may be the layman's
term; the technical term I assume is 'replication'). Although it can be
difficult for less prominent, popular, eloquent communicators to raise such
challenges, without fear of reprisal, it is important to get as close to the
'truth' or 'truths' as may (or may not) exist. This point applies not only
to formal, refereed journals, but non-refereed published research in any
form as well.

And, from the world of accounting
& auditing practice, (or any job, really), the lesson is the same:

2. even the most
prominent, popular, and eloquent communicator(s) -e.g. audit clients....should not be above third party
review and questioning; once again, it can be difficult for less prominent,
popular, and eloquent communicators (internal or external audit staff,
whether junior or senior staff) to raise challenges in the practice of
auditing in the field (which is why staffing decisions, supervision, and
backbone are so important). And we have seen examples where such challenges
were met with reprisal or challenge (e.g. Cynthia Cooper challenging
WorldCom's accounting; HealthSouth's Richard Scrushy, the Enron - Andersen
saga, etc.)

Additionally, another lesson
here, (I repeat this is my personal opinion only)
is that in the field of standard-setting or rulemaking, testimony of
'prominent' experts and 'eloquent communicators' should be judged
on the basis of substance vs. form, and others
(i.e. those who may feel less 'prominent' or 'eloquent') should step up to
the plate to offer concurring or counterarguments in verbal or written form
(including comment letters) if their experience or thought process
leads them to the same conclusion as the more 'prominent' or 'eloquent'
speakers/writers - or in particular, if it leads them to another view.

I wonder sometimes, particularly
in public hearings, if individuals testifying believe there is
implied pressure to say what one thinks the sponsor of the hearing expects
or wants to hear, vs. challenging the status quo, particular proposed
changes, etc., particularly if they may fear reprisal. Once again, it is
important to provide the facts as one sees them, and it is about substance
vs. form; sometimes difficult to achieve.

If you follow the entertainment business at all,
you're probably well aware of "Hollywood accounting," whereby very, very,
very few entertainment products are technically "profitable," even as they
earn studios millions of dollars. A couple months ago, the Planet Money
folks did a great episode explaining how this works in very simple terms.
The really, really, really simplified version is that Hollywood sets up a
separate corporation for each movie with the intent that this corporation
will take on losses. The studio then charges the "film corporation" a huge
fee (which creates a large part of the "expense" that leads to the loss).
The end result is that the studio still rakes in the cash, but for
accounting purposes the film is a money "loser" -- which matters quite a bit
for anyone who is supposed to get a cut of any profits.

For example, a bunch of you sent in the example of
how Harry Potter and the Order of the Phoenix, under "Hollywood accounting,"
ended up with a $167 million "loss," despite taking in $938 million in
revenue. This isn't new or surprising, but it's getting attention because
the income statement for the movie was leaked online, showing just how
Warner Bros. pulled off the accounting trick:

In that statement, you'll notice the "distribution
fee" of $212 million dollars. That's basically Warner Bros. paying itself to
make sure the movie "loses money." There are some other fun tidbits in there
as well. The $130 million in "advertising and publicity"? Again, much of
that is actually Warner Bros. paying itself (or paying its own
"properties"). $57 million in "interest"? Also to itself for "financing" the
film. Even if we assume that only half of the "advertising and publicity"
money is Warner Bros. paying itself, we're still talking about $350 million
that Warner Bros. shifts around, which get taken out of the "bottom line" in
the movie accounting.

Now, that's all fascinating from a general business
perspective, but now it appears that Hollywood Accounting is coming under
attack in the courtroom... and losing. Not surprisingly, your average juror
is having trouble coming to grips with the idea that a movie or television
show can bring in hundreds of millions and still "lose" money. This week,
the big case involved a TV show, rather than a movie, with the famed
gameshow Who Wants To Be A Millionaire suddenly becoming "Who Wants To Hide
Millions In Profits." A jury found the whole "Hollywood Accounting"
discussion preposterous and awarded Celador $270 million in damages from
Disney, after the jury believed that Disney used these kinds of tricks to
cook the books and avoid having to pay Celador over the gameshow, as per
their agreement.

On the same day, actor Don Johnson won a similar
lawsuit in a battle over profits from the TV show Nash Bridges, and a jury
awarded him $23 million from the show's producer. Once again, the jury was
not at all impressed by Hollywood Accounting.

With these lawsuits exposing Hollywood's sneakier
accounting tricks, and finding them not very convincing, a number of
Hollywood studios may face a glut of upcoming lawsuits over similar deals on
properties that "lost" money while making millions. It's why many of the
studios are pretty worried about the rulings. Of course, these recent
rulings will be appealed, and a jury ruling might not really mean much in
the long run. Still, for now, it's a fun glimpse into yet another way that
Hollywood lies with numbers to avoid paying people what they owe (while at
the same sanctimoniously insisting in the press and to politicians that
they're all about getting content creators paid what they're due).

Question
Can you believe a highly respected corporation would over-value an asset just to
spruce up its financial statements?

Gormbley said he was punished for challenging the
valuation of silicon-maker Momentive Performance Materials, an investment asset.
GE Capital overstated Momentive’s value in December 2008 to improve its own
balance sheet, he said. Valuing the asset correctly would have reduced ‘GE
Capital’s earnings 100 percent,’ in the fourth quarter that year, according to
the complaint.”
Andrew H. Harris, "Former GE Unit Executive Says He Was Pushed Out for
Questioning Accounting," Bloomberg, September 8, 2010 ---
http://www.bloomberg.com/news/2010-09-08/former-ge-unit-executive-says-he-was-pushed-out-for-questioning-accounting.html
GE Capital denies the allegation.

The U.S. Department of Justice weighed in Tuesday
on the side of several whistle-blowers who have alleged in lawsuits that
various colleges owned by Kaplan Higher Education defrauded the government
of hundreds of millions of dollars by paying incentives to recruiters and
lying to obtain accreditation.

The three cases, all filed under the federal False
Claims Act, were consolidated before the same federal judge in Miami last
year. Kaplan has been arguing to have two of the cases, one filed in
Illinois and the other filed in Florida, dismissed on grounds that under a
"first to file" provision of the act, only the earliest lawsuit filed should
proceed. Kaplan is also arguing that the suit that was filed first, in
Pennsylvania, should be dismissed on grounds that it lacks the specificity
required in a federal fraud case.

(A fourth suit out of Nevada initially was
considered as part of this consolidation, but it never was included).

The Justice Department, however, has urged the
judge to allow the allegations against Kaplan to proceed based on the
various "first-filed" claims from each of the cases, as long as the cases
don't substantially piggyback on one another.

As a condition of participating in federal
student-aid programs, colleges and universities owned by Kaplan affirm that
they will abide by the rules of a "program participation agreement," or PPA,
with the Department of Education. Each of the lawsuits alleges that Kaplan
fraudulently obtained millions in federal student-aid funds by violating
various provisions of that agreement—allegations that the company denies.

The False Claims Act allows individuals to sue on
behalf of the government for alleged fraud. The Justice Department has a
stake in such lawsuits because the government shares in any damages that may
eventually be recovered.

A memorandum it filed on Tuesday, at the request of
Judge Patricia A. Seitz of the U.S. District Court in Miami, suggests that
the department is eager to keep that option open in all three cases. To best
serve the purposes of the False Claims Act, the memo says, "there is no
reason why an allegation of a violation of one provision of a PPA should act
as a first-to-file bar against unrelated allegations of a violation of a
wholly different provision."

A growing number of journal publishers are checking
papers for possible plagiarism as part of their review process.

That's according to the makers of CrossCheck, a
service that checks articles submitted to scholarly journals against
already-published work for possible plagiarism. Over 80 publishing companies
have adopted CrossCheck since its debut in June 2008,
Nature News reported,and the service's increasing
use has sniffed out high rates of plagiarism in the submissions to some
journals.

The anti-plagiarism service uses software from
iParadigms, the California-based company behind Turnitin, which checks
student papers for plagiarized work. CrossCheck compares submitted materials
with the full text of the 25.5 million articles in its database, a
collection of articles pooled by the publishers that subscribe to the
service.

The service, which has been adopted by publishers
including Nature Publishing and Sage, has turned up plenty of copycat work,
including articles that would have been published otherwise. Taylor &
Francis, a publishing company based in the United Kingdom, found that 23
percent of submissions to one of its journals were rejected because they
contained plagiarism,
Nature News reported.(The journals that were
selected to test CrossCheck had seen incidents of plagiarism in the past.)

After using CrossCheck on submissions, one journal
from Mary Ann Liebert, a publisher based in New Rochelle, N.Y., rejected
about 7 percent of articles that had been peer-reviewed and accepted for
publication, said Adam Etkin, assistant vice president and the director of
online and Internet services for the publishing company. On the other hand,
some of the publisher's other journals, out of the dozen or so that have
begun using CrossCheck, have not uncovered any incidents of plagiarism.

After CrossCheck has detected passages that are
identical or similar to work that has already been published, journal
editors must decide what to do next.

This depends on the incident's severity and intent,
Mr. Etkin said. CrossCheck sometimes flags passages as plagiarized when they
have been improperly cited, and, in some instances, there are few ways to
describe methods or materials differently. Editors at his company's journals
sometimes contact authors to ask them to revise their work or correct their
citations.

The consequences are much more severe when
plagiarists are caught: Authors have been banned from Mary Ann Liebert's
journals after they were caught plagiarizing—in one instance, for three
years. In some cases, the violations have been reported to the author’s
institution.

A 2300 page bill is usually an indication of many
political compromises. The Dodd-Frank financial reform bill is no exception,
for it is a complex, disorderly, politically motivated, and not well thought
out reaction to the financial crisis that erupted beginning with the panic
of the fall of 2008. Not everything about the bill is bad-e.g., the
requirement that various derivatives trade through exchanges may be a good
suggestion- but the disturbing parts of the bill are far more important. I
will concentrate on five major defects, including omissions.

1. The bill adds regulations and rules about many
activities that had little or nothing to do with the crisis. For example, it
creates a consumer financial protection bureau to be housed at the Fed that
is supposed to protect consumers from fraud and other abusive financial
practices. Yet it is not apparent that many consumers were victimized during
the financial boom years, or that consumer behavior had anything of
importance to do with the crisis. For example, consumers who took out
subprime mortgages that required almost no down payments and had low
interest rates were not victimized since these conditions enabled them to
cheaply own houses, at least for a while. The “victims” were the banks, and
especially Fannie Mae and Freddie Mac, that were foolishly willing to hold
such risky mortgages.

The bill gives the Fed authority to limit
interchange or “swipe” fees that merchants pay for each debit-card
transaction, although these fees had not the slightest connection to the
financial crisis. Such price controls are in general undesirable, and hardly
seem to require the attention of the Federal Reserve. The bill also gives
the SEC authority to empower stockholders to run their own candidates for
corporate boards of directors. Corporate boards often receive some blame for
the crisis-mainly unjustified in my opinion- but stockholder election of
some members will not improve corporate governance, and will probably make
that worse.

2. The Dodd-Frank bill gives several government
agencies considerable additional discretion to try to forestall another
crisis, even though they already had the authority to take many actions. The
Fed could have tightened the monetary base and interest rates as the crisis
was developing, but chose not to do so. The SEC and various Federal Reserve
banks-especially the New York Fed- had the authority to stop questionable
lending practices and increase liquidity requirements. These and other
government bodies did not use their authority to try to head off the crisis
partly because they got caught up in the same bubble hysteria as did banks
and consumers. In addition, regulators are often “captured” by the firms
they are regulating, not necessarily because the regulators are corrupt, but
because they are mainly exposed to arguments made by the banks and other
groups they are regulating.

Despite the fact that regulators failed to use the
powers they already had, the bill mainly adds not clear rules of behavior
for banks, but additional governmental discretionary power. For example, the
bill creates the Financial Stability Oversight Council, a nine-member panel
drawn from the Fed, SEC, and other government agencies, that is supposed to
monitor Wall Street’s largest companies and other market participants to
spot and respond to any emerging growth in systemic risk in the economy.
With a two-thirds vote this Council could impose higher capital requirements
on lenders and place hedge funds and dealers under the Fed’s authority.
Given the regulators reluctance to use the power they already had to
forestall the crisis, it seems highly unlikely that this Council will act
decisively prior to the emergence of a crisis, especially when a two thirds
majority is required.

3. Insufficient capital relative to bank assets was
an important cause of the financial crisis. The bill does reduce the ability
of banks to count as bank capital certain risky assets, such as trust
preferred securities, and gives the Fed authority to impose additional
capital and liquidity requirements on banks and non-bank financial
companies, including insurers. I would have preferred a simple rule that
raised capital requirements of banks relative to their assets, especially
capital of larger and more interconnected banks. As suggested by Raghu Rajan
and the Squam Lake group of economists, the bill probably should have
required larger banks to issue “contingent” capital, such as debt that
automatically converts to equity when the banks are experiencing large
losses, or when a bank’s capital to asset ratio falls below a certain level.

4. One of the most serious omissions is that the
bill essentially says nothing about Freddie Mac or Fannie Mae. In 2008 these
organizations were placed into conservatorship of the Federal Housing
Finance Agency. During the run up to the crisis, Barney Frank and others in
Congress encouraged Freddie and Fannie to absorb most of the subprime
mortgages. In 2008 they held over half of all mortgages, and almost all the
subprimes. They have absorbed even a larger fraction of the relatively few
mortgages written after 2008. Freddie and Fannie deserve a considerable
share of the blame for the crisis, but they continue to have strong
political support. I would like to see both of them eventually dissolved,
but that is unlikely to happen. Instead we are promised that they will be
dealt with in future legislation, but I am skeptical that anything will be
done to terminate either organization, or even improve their functioning.

5. Many proposals in the bill will have highly
uncertain impacts on the economy. These include, among many other
provisions, the requirement that originators of mortgages and other assets
retain at least 5% of the assets they originate, that many derivatives go on
organized exchanges (may be an improvement but far from certain), that hedge
funds become more closely regulated, and that consumer be “protected” from
their financial decisions.

Most of these and other changes in the bill are not
based on a serious analysis of what contributed to the financial crisis, but
rather are the result of political and emotional reactions to the crisis.
Usually, such reactions do more harm than good. That is likely to be the
fate of the great majority of the provisions of the Dodd-Frank bill.